Financial and Tax

Cancel Your Private Mortgage Insurance

Published: December 21, 2009

Private mortgage insurance is unavoidable for some homeowners, but don't pay PMI premiums a day longer than required by your lender.

Private mortgage insurance provides protection to a lender in case you default on your home loan. Unless you make a 20% downpayment on a house, you'll most likely be required to purchase PMI. PMI premiums on a median priced home ($198,100 in 2008) can run between $50 and $100 per month, according to the Mortgage Insurance Companies of America.
PMI might be unavoidable, but it isn't eternal. Knowing exactly when you're entitled to cancel coverage can save you a bundle. If you own a median priced home, you'll pocket between $600 and $1,200 for each year's worth of premiums you can avoid. That extra cash can be used to pay down your principal instead.
When PMI is cancelled automatically
Though often maligned, PMI plays an important role. Many aspiring homeowners, especially first-time buyers, simply can't afford to put down 20% on a house. Without the safeguard offered by PMI, lenders would be reluctant to extend mortgages to low-equity purchasers.

For many borrowers, the coverage is short-lived. The Mortgage Insurance Companies of America (http://www.privatemi.com/), the industry trade group, estimates that 90% of homeowners are done paying PMI premiums, which are tax-deductible (http://www.houselogic.com/articles/deduct-private-mortgage-insurance/) for some, within five years.

coverage is short-lived. The Mortgage Insurance Companies of America (), the industry trade group, estimates that 90% of homeowners are done paying PMI premiums, which are tax-deductible () for some, within five years.

If you purchased a house since 1999 and are still paying PMI, you probably fall under the Homeowners Protection Act (HPA) of 1998. Your lender is required to automatically cancel your insurance once you've paid down your mortgage to a 78% (0.78) loan-to-value ratio, or LTV. Put another way, once you have 22% equity built up. Many lenders will treat pre-HPA loans in a similar fashion. Call to confirm.

To calculate your LTV, divide the outstanding loan amount by the original price of your home. If you have a $190,000 mortgage on a house you purchased for $200,000, the LTV is 95%. You'd need to get the mortgage balance down to $156,000--78% of the original value--to qualify for automatic cancellation of PMI.
When you need to request cancellation
You don't necessarily have to wait for automatic cancellation. When your LTV hits 80%, you can petition your lender to end its PMI requirement. The process can take several weeks. Your lender isn't obligated to grant your request, but you'll bolster your case if you have a good payment history.

Start by calling your lender, not the PMI provider. You'll probably need to make a formal request in writing (http://www.privatemi.com/loanoptions/benefits/sample.cfm) and pay out of pocket for an appraisal. The average cost of an appraisal is $362, according to a 2009 Bankrate.com survey (http://www.bankrate.com/finance/mortgages/texas-tops-2009-closing-cost-exclusive.aspx). Your lender will usually select the appraiser.

Although an appraisal is conducted primarily for the benefit of the lender to confirm that your property hasn't declined from its original value, a high appraisal can work to your advantage. As your property value increases, whether due to a general uptick in real estate prices or specific home improvements, your LTV decreases.

Justine DeVito Tenney, a CPA and financial planner with Weiser LLP in Lake Success, N.Y., points out that even if you don't meet the 78% or 80% milestones, you can get PMI cancelled when you hit the mortgage midpoint. On a 30-year fixed-rate mortgage, that would occur after 15 years of payments. This can come into play for certain high-risk loans that call for a longer PMI period.
A way around PMI premiums
In search of a PMI loophole? Look for so-called piggyback loans, also known as 80/10/10 or 80/15/5 loans. Basically, the home lender finances 80% and immediately gives you a second loan for 10% to 15%. You put down 5% to 10%. No PMI is required.

This alternative has traditionally been available for homebuyers with minimal capital but excellent credit. In tight lending environments, however, this arrangement is harder to come by. And even when piggyback loans are available, the extra interest you usually pay on the second mortgage may actually cost more than PMI premiums. Do the math.

This article provides general information about tax laws and consequences, but is not intended to be relied upon by readers as tax or legal advice applicable to particular transactions or circumstances. Readers should consult a tax professional for such advice, and are reminded that tax laws may vary by jurisdiction.

Richard J. Koreto is a freelance writer. He has been editor of several professional financial magazines and is the author of "Run It Like a Business," a practice management book for financial planners. He and his wife own a pre-Civil War house in Rockland County, N.Y.

Mortgage Interest Deduction Vital to Housing Market

Published: January 11, 2010

The home mortgage interest deduction saves the average homeowner thousands of dollars at tax time, supports home values at the community level, and helps American homebuyers get into their first house.

Current homeowners support the mortgage interest deduction not just because it saves them money-over time, about three-quarters of American taxpayers will benefit from the mortgage interest deduction-but also because they know it's integral to the housing market.
Mortgage deduction savings
Having a tax deduction for mortgage interest makes owning a home more affordable because the deduction lowers the amount of tax you pay. U.S. Census data shows 37% of homeowners with mortgages spend more than 30% of their income for housing. Paying less for housing means having more disposable income for savings and other household expenses.

Increasing housing affordability increases the number of renters who can afford to buy a home of their own. Increasing the number of homebuyers helps keep home prices stable for those who already own homes by ensuring a steady stream of new buyers.
How the deduction works
In general, any homeowners who pay U.S. taxes and who itemize their taxes can deduct mortgage interest attributable to primary residence and second-home debt totaling $1 million, and interest paid on home equity debt of as much as $100,000.
Mortgage interest deduction threatened
In recent years, the mortgage interest deduction has come under attack. President Obama's fiscal year 2010 budget proposed limiting the value of the mortgage interest deduction for upper-income taxpayers, by allowing them to deduct only 28 cents on the dollar, even if they're in a 33% or 35% tax bracket and can now deduct 33 or 35 cents on the dollar.

In August of 2009, the Congressional Budget Office suggested two ways Congress could cut spending by changing the mortgage interest deduction:
?Reduce the $1 million cap by $100,000 a year beginning in 2013 and ending at $500,000 in 2018. This would generate $41.4 billion in additional revenues over 10 years, CBO says.

?Change the mortgage interest deduction to a 15% tax credit, which would increase revenues by $387.6 billion over 10 years.

In the past, members of Congress have suggested other mechanisms for eliminating or limiting the mortgage interest deduction. None of those has ever gained traction.
Opponents question fairness
Those who want to eliminate or reduce the mortgage interest deduction argue that it primarily helps the wealthy, since high-income taxpayers are more likely to itemize their deductions and to own homes. About 90% of taxpayers earning more than $100,000 itemize, while only 18% of those earning less than $50,000 follow suit, the Tax Foundation estimates.

Taxpayers who don't itemize deductions, however, do benefit from the so-called "standard deduction," which simplifies taxes for those with relatively straightforward financial circumstances.

Those who could-but don't-take the deduction often save more by using the standard deduction than itemizing. Therefore, they're getting a greater tax benefit, in relative terms, than those who itemize.

More than 60% of the families who claim the mortgage interest deduction have household incomes between $60,000 and $200,000, NAR estimates. Only 2% of those taking the deduction are high-income taxpayers. What's more, a disproportionate number of those high-income taxpayers live in areas where housing is especially expensive, such as California and New York.

In high-cost housing markets, lowering the $1 million cap would add a tax burden onto families who already must pay high prices for homes.
Protecting the deduction promotes housing
People don't buy homes because of the mortgage interest deduction. They buy homes to satisfy social, family, and personal goals. As the cornerstone of a healthy community, homeownership is the basis for positive community involvement and a family's first step on the ladder to wealth.

In supporting the mortgage interest deduction, you help ensure that tomorrow's families can follow the same path to homeownership that so many of us have already traveled.

Dona DeZube, HouseLogic's News Editor, has been writing about real estate for over two decades. She lives in a suburban Baltimore 1970s rancher on a 3-acre lot shared with possums, raccoons, foxes, a herd of deer, and her blue-tick hound.

How Fannie Mae and Freddie Mac Save You Money

Published: January 11, 2010

Homeowners who use Fannie Mae and Freddie Mac mortgages save thousands of dollars in interest payments each year.

If all you read is the headlines, you might think mortgage market giants Fannie Mae and Freddie Mac have cost the taxpayers billions. However, a deeper look into these two government-sponsored enterprises (GSEs) reveals a decades-long history of making mortgages more affordable, benefiting not just individual homeowners, but whole communities.
Fannie Mae and Freddie Mac are federally chartered organizations designed to bring global capital to local communities by purchasing and guaranteeing loans made by mortgage lenders.

As a homeowner, there are several ways you benefit from Fannie Mae and Freddie Mac. If your loan is owned or guaranteed by one of them, you pay a lower interest rate. And, when the time comes to sell your home, the pool of buyers capable of getting a mortgage is much wider thanks to Fannie Mae and Freddie Mac. To see how a loan guaranteed by one of the GSEs helps you save money, download our free PDF worksheet.

Homeowners who qualify for a Fannie Mae or Freddie Mac mortgage, called a conventional loan, typically get interest rates that are ¼% to ½% lower than non-Fannie Mae, non-Freddie Mac loans. At times when other mortgage funding dries up, the rate difference between GSE and non-GSE loans has jumped to between 1% and 2%.

On average, homeowners who have GSE loans save $17,000 over the life of a 30-year loan. Since 30 million Americans have a GSE-backed loan, that adds up to more than $500 billion in savings for U.S. homeowners.
GSEs stabilize the market
Despite the financial advantage the GSEs create, not everyone supports their mission. Some critics worry that Fannie Mae and Freddie Mac are taking on too much financial risk by guaranteeing mortgages in the current economic climate. Others believe the GSEs should be purely private entities, functioning without an implied or explicit government guarantee at all.

Falling home prices and rising unemployment have challenged the GSEs. When the subprime mortgage crisis hit and expanded into the prime market, there was a sharp decline in home prices and a sharp increase in mortgage delinquencies and foreclosures. The crisis put extreme financial pressure on both Fannie Mae and Freddie Mac.

In September 2008, the two companies were placed in federal conservatorship with the promise of as much as $100 billion each of taxpayer support. However, without those funds, the GSEs would have gone under, putting an end to the steady flow of funds into the U.S. mortgage market. In December 2009, the Treasury Department removed the dollar cap on the amount of assistance it may use to support Fannie and Freddie.

"Absent the engagement of the government through the GSEs and FHA, what was a bad situation would have been catastrophic for the housing market, and potentially catastrophic for the broader economy," says Nicolas P. Retsinas, director of Harvard University's Joint Center for Housing Studies (http://www.jchs.harvard.edu/) and Freddie Mac board member.

Today, the GSEs remain one of the few reliable sources of home mortgage funding, along with mortgages insured by the Federal Housing Administration. In 2008 and 2009, more than 75% of new home loans were bought, or guaranteed, by Freddie Mac and Fannie Mae.
Loan limits
Congress sets a maximum Fannie Mae and Freddie Mac maximum loan limit. Homeowners who need to sell find that there are more borrowers for homes priced at or below the GSE maximum loan amount, which is $417,000, or up to as much as $729,750 for some high-cost areas.

It can be hard for buyers to find lenders willing to lend more than the GSE loan limits because lenders have to hold such loans in their bank portfolio in the current financial situation. Until the recent financial crisis, lenders were able to sell mortgages above the GSE limits to companies that turned them into private mortgage-backed securities.

Until the summer of 2008, the nationwide loan limit was $417,000, far too low to be of use to many homeowners and prospective homebuyers in California and other high cost areas, says U.S. Representative Brad Sherman (D-Calif.), who has proposed legislation raising the loan limits permanently to $729,750.

"Buyers in high cost areas, such as Southern California, are at an extreme disadvantage simply because of where they choose to work and live," he says. "For the overall economy to recover, every part of the housing market needs to improve, including high cost areas."

Higher loan limits can also help homesellers. If the limits correspond to market values, buyers can use less-expensive GSE loans, so the number of buyers who can afford your home increases. With more potential buyers, competition for individual properties increases. With more competition, the value of the property can increase.

In the final analysis, the benefits of the GSEs outweigh the cost. Their long track record of making mortgages available in all markets benefits homeowners, communities, and the nation as a whole.
Jeannette Bernay has been in the real estate industry for over two decades. She lives in western Washington State on an 8-acre lot shared with her two horses, twp dogs, and three cats.

Avoid Foreclosure Rescue Scams

Published: January 15, 2010

With foreclosure rescue scams widespread as more homeowners fall behind on mortgage payments, be smart if you seek help.

A record high 2.8 mllion properties were hit with foreclosure notices (http://www.realtytrac.com/contentmanagement/pressrelease.aspx?channelid=9&accnt=0&itemid=8333) in 2009, putting even more Americans at risk of facing foreclosure rescue scams. Homeowners who fall behind on mortgage payments need to tread carefully when seeking assistance, since foreclosure rescue scams come in many guises. A day spent researchng legitimate options, from a mortgage modification or principal forebearance to a short sale or deed-in-lieu, could keep you from becoming a scam victim.
Foreclosure rescue scams run rampant
Homeowners facing foreclosure are prime targets for scam artists. The U.S. Federal Trade Commission identified 71 companies (http://www.ftc.gov/opa/2009/04/loanfraud.shtm) running suspicious foreclosure rescue ads, and the Better Business Bureau counts foreclosure rescue rip-offs among its top 10 scams (http://dc-easternpa.bbb.org/NewsStory.asp?sid=100106Top10). Understanding how these scams work can help you avoid becoming a victim.

The variations are seemingly endless, but one popular foreclosure scam involves a representative of a so-called foreclosure rescue company promising to negotiate a deal with your lender. The rep, vowing to take care of everything, will instruct you not to contact your lender, lawyer, or credit counselor during the supposed negotiations. The more brazen ones will even tell you to pay your mortgage directly to them.

Once you pay an upfront fee or hand over a few months' worth of mortgage payments, the scam artist will disappear. You'll be left with an emptier wallet and a mortgage that's in even deeper trouble because no deal was cut and no payments were made on your behalf. According to John Riggins, chief executive of the Fort Worth, Texas, office of the Better Business Bureau, upfront fees can range from $500 to $5,000.
Rip-offs come in many forms
A bankruptcy foreclosure scam can involve a promise to fend off foreclosure in exchange for an upfront fee. Instead of getting you legitimate relief, the fraudster will pocket the fee and secretly file a bankruptcy case in your name. The scam may seem to work initially, because a bankruptcy filing will stop foreclosure proceedings temporarily, but they'll resume. Compounding your problems, a bankruptcy can mar your credit report for 10 years.

Another common scam, called the bait-and-switch, results in a scam artist taking ownership of your home. You sign documents supposedly for a new loan that will make your mortgage current. What's really happening is you're signing over the deed of your house. In this scenario you would still owe on your mortgage but no longer own the home.

In a rent-to-own scheme, you're told to surrender a home's deed as part of a deal that lets you stay put as a renter. The scam artist, perhaps claiming to be able to refinance at a better rate with you off the title, promises to sell the house back to you in the future. However, terms of the deal may make it all but impossible for you to repurchase the home, or the scammer may get you evicted by raising the rent beyond your means. Either way, you end up losing the home while remaining on the hook for the unpaid mortgage.
Look out for red flags
Being aware of the warnings signs can protect you from foreclosure rescue scams. Red flags (http://www.loanscamalert.org/things-you-should-know.aspx) include:
?Demands for high upfront fees.
?Guarantees to stop a foreclosure.
?Instructions to make mortgage payments to someone other than your lender.
?Pressure to sign over a deed.

Legitimate foreclosure counselors won't put on a full-court press, nor will they guarantee that you won't lose your home to foreclosure. What they will do is review your financial situation and offer up options. Foreclosure counselors approved (http://www.hud.gov/offices/hsg/sfh/hcc/fc/) by the U.S. Department of Housing and Urban Development won't charge you a fee either.
Legitimate ways to get foreclosure help
There are a number of legitimate ways to contend with foreclosure. If you've missed mortgage payments, start by getting in touch with your lender. Ask to speak with someone in the Loss Mitigation Department and explain your situation.

Your lender may be able to arrange a repayment plan, called a special forbearance, based on your current economic circumstances. The lender could even give you a temporary reduction in your monthly payment or suspend payments for a period of time.

With a principal forbearance, the lender will reduce the amount of your mortgage, thus reducing your monthly payments. However, the amount of the principal reduction doesn't disappear. Rather, it's tacked on to the end of the loan, effectively creating a balloon payment.

A federally facilitated mortgage modification could also help. The Making Home Affordable modification program (http://www.houselogic.com/articles/making-home-affordable-modification-option/) pays lenders to re-work loan terms and lower monthly payments. Be prepared to gather lots of paperwork and undergo a trial modification.

If all else fails, you may need to give up your home. If so, look into the federal Home Affordable Foreclosure Alternatives (https://www.hmpadmin.com/portal/docs/news/hampupdate113009.pdf) program. HAFA offers lenders financial incentives to opt for a short sale or deed-in-lieu rather than a foreclosure. In a short sale, a lender agrees for a home to be sold for less than the outstanding mortgage, and then considers the debt paid off. In a deed-in-lieu, a homeowner turns over the home to the lender, and the mortgage is closed.

Donna Fuscaldo has written about personal finance for Dow Jones, the Wall Street Journal, and Fox Business News for more than a decade. Like many homeowners, her mortgage is precariously close to being underwater.

Tax Credits for Adding or Replacing Insulation

Published: September 09, 2009

Adding insulation is one of the easier and cheaper ways to improve your home's energy efficiency and cut your heating and cooling bills.

If putting a dent in your home's heating and cooling bills is a priority, then adding insulation needs to be at the top of your to-do list. It's a relatively affordable home-improvement project, and the savings can be felt almost immediately. Some DIYers can even tackle the project themselves over a weekend.
For a 2,200 square foot home, adding insulation to an attic can cost from $1,000 to $2,500 including labor, depending on how much you put in and how easy it is to install. Effort and expense go up when you add insulation to exterior walls or around hard-to-reach ductwork. A federal energy tax credit worth up to $1,500 can help defray the cost.
It all comes down to R-value
Insulation is measured in R-value, the resistance to heat flow. The higher the number the better the insulating power. The U.S. Department of Energy recommends R-values (http://www1.eere.energy.gov/consumer/tips/insulation.html) between 30 and 60 for most attics. Take a peek in yours. If your insulation is level with or below the attic floor joists, then you probably need more.
There are different types of insulation, including fiberglass, cellulose, mineral wool, spray foam, foam board, and cotton batting. The most familiar is pink fiberglass roll insulation. If you're not sure what's best suited for your home, check with an insulation contractor. Just about all insulation qualifies for the energy tax credit (more below) as long as its primary purpose is to insulate-insulated siding, for example, doesn't count-and it brings your home up to recommended R-value guidelines.
Energy Star (http://www.energystar.gov/index.cfm?c=home_sealing.hm_improvement_insulation_table), a joint program of the DOE and U.S. Environmental Protection Agency, suggests R-38 insulation for most attics (or about 12-15 inches, depending on the insulation type). In colder climates, R-49 may be required. The DOE's online calculator (http://www.ornl.gov/sci/roofs%2bwalls/insulation/ins_16.html) can recommend R-values for all areas of your home's "envelope": attic, walls, floors, basement, and crawl spaces.
Generally, most homes built before 1980 have inadequate insulation. The easiest insulation to add is blown loose-fill insulation. You'll probably need to hire a contractor. Since insulating an attic isn't too complicated, you can get quotes-at least three-by phone. However, get a copy of the quote in writing before work starts, and be sure it specifies R-value. Michael Kwart, executive director of the Insulation Contractors Association of America (http://www.insulate.org/), recommends rolled insulation for do-it-yourselfers. New insulation can be added on top of existing insulation.
Savings and sustainability can add up
Depending on where you live and how much insulation you already have, adding more can trim heating and cooling costs anywhere from 10% to 50%. A homeowner in the Northeast with an uninsulated attic, for instance, can save about $600 a year by adding about 15 inches of insulation (R-38) between the rafters, according to the Energy Department. Just 6 inches can net annual savings of about $200.
The $1,500 federal tax credit (http://www.energystar.gov/index.cfm?c=tax_credits.tx_index) can be applied toward 30% of the cost of insulation installed in your primary residence during 2009 and 2010. Let's say you spend $1,760 on enough R-38 roll fiberglass to insulate the attic of your 2,200 square foot home. That's $40 per 50 square feet retail, a fair estimate. You'll be able to subtract $528 (30% of $1,760) straight off the top of your tax bill, as long as you paid more in federal taxes than you're claiming in credits. Since a typical homeowner won't be able to use up the entire tax credit on insulation alone, the remainder can be applied to other qualifying energy-efficiency upgrades like new windows (http://www.houselogic.com/articles/tax-credits-replacing-windows-doors-and-skylights/) or roofing (http://www.houselogic.com/articles/tax-credits-replacing-your-roof/). Just keep in mind that the total credit claimed for all of these improvements can't exceed $1,500 for the two-year period.
Save receipts, and if a contractor did the work, get a receipt that's itemized. Labor costs, typically 25% of the total bill, according to Kwart, don't count toward the tax credit. There's no need to file receipts when you claim the credit on Form 5695, but the IRS could ask you to cough one up later. Also hold on to product stickers from packaging that show R-values and manufacturers' certification statements that attest to tax-credit worthiness. Check manufacturers' websites for a copy of the statement. If you're building a new home, you're out of luck; only existing homes qualify for this tax credit, which can't be carried over into future years.
Adding insulation is just the beginning
In conjunction with adding new insulation, conduct a whole-house energy audit (http://www.houselogic.com/articles/paid-energy-audits-the-costs-and-benefits/) to find other ways to reduce power consumption and save even more on monthly bills. Caulk around drafty windows and doors, and stop gaps in siding and the foundation, says Matt Golden, president and founder of San Francisco-based Sustainable Spaces (http://www.sustainablespaces.com/). Reducing a home's air leakage by 25% can lower annual energy costs by about $300, according to the Lawrence Berkeley National Laboratory (http://www.lbl.gov/).
This article provides general information about tax laws and consequences, but is not intended to be relied upon by readers as tax or legal advice applicable to particular transactions or circumstances. Readers should consult a tax professional for such advice, and are reminded that tax laws may vary by jurisdiction.

Gil Rudawsky has been covering business and consumer issues as a reporter and an editor for 18 years, most recently as a business editor at the Rocky Mountain News. He lives in a house built in the 1930s, and always keeps the home's character in mind when making upgrades.

Tax Credits for Replacing Heating and Cooling Systems

Published: September 21, 2009

Upgrading to an energy-efficient heating and cooling system can save hundreds on your utility bills and up to $1,500 on your tax bill.

Replacing an aging heating and cooling system can save you money on energy costs. According to Energy Star, the federal government's program to promote energy-efficient products and practices, the average household spends about $1,900 a year on energy bills, with about half of that amount going toward heating and cooling. Upgrading your heating, ventilation, and air conditioning (HVAC) to energy-efficient units can cut utility costs by about 20%, or $200 annually, on average.
This type of home improvement doesn't come cheap. Prices vary widely based on where you live, unit specifications, and the condition of your home, but figure a high-efficiency furnace will start at around $3,500, including installation, estimates Corbett Lunsford, executive director of Chicago-based Green Dream Group. A standard furnace may cost $2,400. To help offset the price difference, the IRS allows a tax credit worth up to $1,500 on eligible HVAC systems put into service during 2009 or 2010. Consult a tax adviser.
Pay attention to efficiency ratings
To earn an Energy Star rating, furnaces must be more efficient than standard units, with annual fuel utilization efficiency ratings, or AFUE, of 85% for oil furnaces and 90% for gas furnaces. The Energy Star seal of approval alone isn't enough to garner the federal tax credit. Credit-eligible (http://www.energystar.gov/index.cfm?c=tax_credits.tx_index#c3) gas furnaces (either natural gas or propane) must have AFUE ratings of 95% or greater; oil furnaces, 90%. A boiler must have an AFUE of 90%.

Heating by burning a fuel is inherently inefficient. Simply put, high-efficiency furnaces have components that are better designed to get more heat out of the combustion process, Lunsford says. You'll need to hire an HVAC contractor to calculate the size of the equipment needed for your home. Beware bidders who take a one-size-furnace-fits-all approach. Air source heat pumps (http://energystar.custhelp.com/cgi-bin/energystar.cfg/php/enduser/std_adp.php?p_faqid=5799) and advanced main circulating fans can also qualify for the $1,500 tax credit.

Technically, a homeowner could replace either a furnace or a central air-conditioning unit and be eligible for the tax credit. Practically speaking, you probably will have to replace both for the A/C to qualify, says Enesta Jones, a spokeswoman for the U.S. Environmental Protection Agency. Most homes have split systems made up of an outdoor condenser and compressor that are connected to an indoor air handler that's part of the furnace. Split systems must have a SEER rating of at least 16 and an EER rating of at least 13. The higher the rating, the more energy efficient the unit. A package A/C system, which houses all of its components outdoors, requires lower ratings.
HVAC's value goes beyond savings
It typically takes about a decade's worth of energy savings to recoup the investment in a new HVAC system, Lunsford says, though that time frame can vary greatly depending on how much fuel prices fluctuate. Less apparent in dollar terms are increasing the comfort level in your home and lowering your household's drain on non-renewable fossil fuels. Then there's the effect on your home's value when it comes time to sell.

You're going to enhance a home's salability by moving to a more energy-efficient heating and cooling system, says Frank Lesh, president of Home Sweet Home Inspection Co. in Indian Head Park, Ill. That doesn't mean adding a $5,000 furnace will add $5,000 to the sale price. Rather, potential buyers are less likely to push for repairs or negotiate a credit if the HVAC is in good shape. Evaluate systems older than 10 years for possible replacement.

But before you do, conduct a wider energy audit (http://www.houselogic.com/articles/conduct-your-own-energy-audit/) of your home. Lunsford, also manager of consumer education for the U.S. Green Building Council's Chicago Chapter, says he rarely recommends replacing a furnace as the first step in making a home more energy efficient. Instead, start by sealing it against air leaks. Do-it-yourself caulking and weather-stripping help, as does adding insulation in the attic. Professional air sealing, which is more effective, can cost as much as $5,000 for a large house, he says. The payoff: Energy costs should go down, and you might be able to get by with a smaller HVAC system.
Getting tax credit for your upgrades
The federal energy tax credit is based on 30% of the cost of an eligible HVAC system. Installation charges count too. A $5,000 bill would max out the credit. You'll need to owe more in taxes than you're trying to claim in credits to qualify. Use IRS Form 5695. Save receipts for your records, as well as manufacturers' certification statements. If part of a new HVAC system qualifies for the credit but another part doesn't, ask the contractor to itemize the receipt.

The tax credit is aggregated for all qualifying energy upgrades-insulation, roofs, windows, and so on-so you can't claim separate $1,500 credits for each project. Only improvements to your existing primary residence count. New homes and second homes are excluded.
This article provides general information about tax laws and consequences, but is not intended to be relied upon by readers as tax or legal advice applicable to particular transactions or circumstances. Readers should consult a tax professional for such advice, and are reminded that tax laws may vary by jurisdiction.

Suzanne Cosgrove, who spent nine years as an editor at the Chicago Tribune, has written for a number of business and real estate publications. She has a 90-year-old house and a long list of home-improvement projects.

Tax Credits for Replacing Windows, Doors, and Skylights

Published: September 09, 2009

If money seems to be escaping through drafty windows, doors, and skylights, this federal tax credit might make energy-efficient replacements more affordable.

Does it feel like money is escaping through your home's drafty windows, doors, and skylights? You might be able to keep at least some of that cash in your pocket by taking advantage of federal energy tax credits for retrofitting your house with qualified energy-efficient replacements. You can claim a tax credit of up to $1,500 for upgrading the windows, exterior doors, and skylights in your primary residence during 2009 and 2010.
The credit is based on 30% of the cost of materials, so a $5,000 purchase would max it out. But a tax credit alone isn't reason enough to start calling contractors. Do a little homework first. The true value of replacing aging windows, doors, and skylights isn't always an open-and-shut case.
Follow the 15-year rule for windows
A good rule of thumb for window replacement: Don't bother if they're less than 15 years old, says Jim Rooney, a home inspector in Annapolis, Md. The savings on your energy bills likely will be negligible since window technology hasn't changed that radically and the integrity of your windows should still be intact. Shoddy installation or poor manufacturing may call for exceptions to the 15-year rule. Windows that are 20, 30, or more years old are prime candidates for replacement.
Most of your focus should be on windows, since they're more numerous, but skylights are notorious for energy loss too, not to mention water leaks. Exterior doors tend to outlast windows, so keep them unless the upgrade is purely for aesthetic reasons. Besides, weather stripping and snug sweeps can boost the energy efficiency of exterior doors for a whole lot less money.
Adding up the costs-and savings
With windows, doors, and skylights, you get what you pay for. Expect to shell out between $500 and $1,000 per window including installation, or about $10,000 total for a moderately sized house of about 2,000 square feet. New energy-credit-qualified doors and skylights are also in the $500 to $1,000 range, including installation.
Tom Herron, of the National Fenestration Rating Council (http://www.nfrc.org/), says products on the higher end of the cost scale are usually better constructed and more energy efficient. NFRC is a non-profit organization that administers the rating and labeling system for the energy performance of windows, doors, and skylights.
It could take years to recoup the upfront costs, but you should see an immediate reduction in your energy bills. In general, you'll save $126 to $465 a year if single-pane windows in a 2,000 square foot house are replaced with tax-credit-eligible windows, according to the Efficient Windows Collaborative, a trade group. That's 15% to 40% off the typical energy bill.
Do my replacements qualify?
A label alone doesn't guarantee your new windows, doors, and skylights qualify for the energy tax credit, but it does provide critical information related to eligibility. To qualify, windows, doors, and skylights must have a U-factor (http://www.efficientwindows.org/ufactor.cfm) of 0.30 or less and a Solar Heat Gain Coefficient (http://www.energycodes.gov/support/shgc_faq.stm) (SHGC) of 0.30 or less. The U-factor measures how well a product prevents heat from escaping, and the SHGC gauges how well a product blocks heat from the sun. Labels also carry information on light transmission, air leakage, and condensation resistance.
Herron, of the NFRC, says about 80% to 85% of the manufacturers in North America provide NFRC labels. All Energy Star qualified windows carry an NFRC label (http://www.nfrc.org/Label.aspx), according to Energy Star, a joint program of the U.S. Department of Energy and the U.S. Environmental Protection Agency that promotes energy-efficient products and practices.
Resist the urge to trim costs by purchasing cheaper windows, doors, and skylights with poor U-factor and SHGC ratings. Not only will you miss out on the tax credit, energy bills won't come down much.
Taking advantage of the tax credit
A credit is especially valuable because it directly reduces the amount of tax owed, as opposed to a deduction, which lowers the amount of taxable income. To be eligible for the full credit you must owe more in federal taxes than you're trying to claim. Use IRS Form 5695 to take advantage of the credit, which is cumulative for 2009 and 2010 only. You can't claim $1,500 for each tax year, but you can spread the $1,500 over the two-year period.
Uncle Sam may want proof that your new windows, doors, and skylights meet energy-efficiency standards, so be sure to save receipts, product stickers, and certification statements. The latter can often be found on packaging or manufacturers' web sites. As for receipts, ask contractors to itemize expenses. Installation costs aren't eligible for the credit; only materials are.
Keep in mind that a variety of energy-efficiency improvements to your existing home, including insulation, roofs, and HVAC, count toward the credit limit. You can't claim separate $1,500 credits for each upgrade, nor can you claim the credit for a newly built home. Matt Golden, president and founder of San Francisco-based Sustainable Spaces (http://www.sustainablespaces.com/), says homeowners can often lower energy costs for a lot less, and still get the tax credit, by insulating attics (http://www.houselogic.com/articles/save-money-with-insulation-upgrade/) instead.
This article provides general information about tax laws and consequences, but is not intended to be relied upon by readers as tax or legal advice applicable to particular transactions or circumstances. Readers should consult a tax professional for such advice, and are reminded that tax laws may vary by jurisdiction.

Gil Rudawsky has been covering business and consumer issues as a reporter and an editor for 18 years, most recently as a deputy editor at the Rocky Mountain News. He lives in a house built in the 1930s, and always keeps the home's character in mind when making upgrades.

Tax Credits for Replacing Your Roof

Published: September 16, 2009

Upgrading to a qualifying energy-efficient metal or asphalt roof can cut your cooling bill as well as knock off up to $1,500 from your tax bill.

The roof of your house protects against more than rain. The sun's rays beat down relentlessly, especially during summer. The intense heat can raise the temperature inside your home. Proper venting and insulation help keep the cool air in and the warm air out. So, too, do energy-efficient roofing materials, which take the brunt of the solar onslaught. Uncle Sam is encouraging homeowners to improve the roofs of their primary residences with a tax credit worth up to $1,500.
During 2009 and 2010, you can claim a credit for 30% of the cost of qualifying asphalt or metal roofing materials. The credit, which should be taken on IRS Form 5695 for the tax year in which the work is completed, can be split between 2009 and 2010 but can't exceed $1,500 total for both years. You can't claim more in credits than you owe in taxes.
Metal vs. asphalt roofs
To qualify for the tax credit, you must use either metal or asphalt roofing materials that are designed to reduce heat gain-the amount of heat transferred into a home-and meet the requirements of Energy Star (http://www.energystar.gov/), a federal program that promotes energy-efficient products and practices. Metal roofs must have appropriate pigmented coatings and asphalt roofs must have appropriate cooling granules. Asphalt materials can be either traditional shingles or modified bitumen (rolled asphalt sheets). Energy Star has a list (http://downloads.energystar.gov/bi/qplist/roofs_prod_list.pdf) of all of its approved roofing products, but only the metal and asphalt materials may qualify for the tax credit.

It's a good idea to hang on to manufacturers' certification statements (http://www.gerardusa.com/Energy%20Star/ESTaxCert.pdf) that attest to the tax credit-worthiness of the roofing materials you purchase. These can usually be found on product packaging or company websites. You don't need to file these with your tax return, but the IRS could ask for them later. Consult a tax adviser.

Dean Kucharski, a 22-year veteran of the roofing business in Pontiac, Mich., estimates that for a typical 2,200-square-foot home, a mid-range asphalt roof will run about $7,000 to $12,000, including labor. The good news is that it will likely last 20 years or more. For a metal roof, expect to pay twice as much, though it can last for 50 years, he says. If you hire a contractor, get an itemized bill that breaks out the cost of materials since labor doesn't count toward the tax credit. Materials should account for about half the bill on standard roofing jobs.
How much roof do I have?
You can get a rough estimate of how much roofing material you'll need by figuring the square footage of the footprint of your home and adding about one-third more to account for roof pitch, overhangs, dormers, gables, and so on. Roofing contractors often quote in terms of "squares." One square equals 100 square feet. So if a roofer says your house is 20 squares, it means it's roughly 2,000 square feet-20 times 100.

Once you're ready to pick a roof type, Kucharski suggests talking to an area building wholesaler or a company that specializes in roofing materials. It's important to consult with someone who knows what types of materials are appropriate for a given region's climate. Big-box retailers may not have as wide a selection or knowledgeable staff.

Finding a good roofer entails the same steps as finding any qualified contractor: ask neighbors for recommendations, collect at least three bids, check references, and get everything in writing. Craig Silvertooth, executive director of the Center for Environmental Innovation in Roofing (http://www.roofingcenter.org/), recommends finding a contractor through the National Roofing Contractors Association (http://www.nrca.net/), which has about 4,000 members.
Save on cooling bills
You'll get the most bang for your roof-renovation buck if you live in a hot climate, namely the South and Southwest. Expect to save between 7% and 15% on your cooling costs with energy-efficient roofing materials, says Michelle Van Tijen of the Cool Roofs Rating Council (http://www.coolroofs.org/). If you pay $300 a month to cool your home, figure you'll cut your monthly bill by up to $45.

Ironically, with roofs there is such a thing as being too energy efficient. In winter months, roofing materials with very high heat-deflecting qualities can increase heating bills. However, you're more than likely to make up the difference on your air-conditioning costs. That's especially true if you live in an area where you run your air conditioner much of the year.

Think hard before replacing a roof that's in perfectly good shape. Consider instead a roof coating, a material painted over your existing roof that offers insulation and sun reflection, says Silvertooth. Roof coating costs about 75% less than replacing a roof, though it doesn't qualify for the tax credit. Another affordable way to save on cooling costs that doesn't even involve the roof is to add more insulation (http://www.houselogic.com/articles/tax-credits-adding-or-replacing-insulation/) to your attic. This home-improvement project can even be tackled by weekend warriors, and it qualifies for a federal tax credit.
This article provides general information about tax laws and consequences, but is not intended to be relied upon by readers as tax or legal advice applicable to particular transactions or circumstances. Readers should consult a tax professional for such advice, and are reminded that tax laws may vary by jurisdiction.

Tax Credits for Solar Water Heaters

Published: October 22, 2009

A federal tax credit makes energy-efficient solar water heaters a more affordable and sustainable option for many homeowners.

A solar water heater uses the renewable thermal energy produced by the sun to warm water for your shower, washing machine, and dishwasher. Better yet, it does it at a fraction of the price of a conventional storage tank water heater. If you take the plunge and purchase a solar water heater, expect to see your home's water-heating bill cut in half.
The financial attraction doesn't end there. A federal energy tax credit that's available through the end of 2016 allows homeowners to shave 30% off the cost of a system. Even new homes and second homes qualify.
How solar water heaters work
Solar water heaters operate (http://www.energystar.gov/index.cfm?c=solar_wheat.pr_how_it_works) in one of two ways: either as a direct system or as an indirect system. A direct system warms water by circulating it via pipes through rooftop solar collectors. An indirect system, also known as a closed-loop system, relies on a non-freezing heat transfer liquid.

The liquid is heated in the solar collectors and returns through pipes to a storage tank, where a heat exchanger inside the tank transfers the heat to the water. Most systems rely on electric pumps to move water (or a transfer liquid) between the storage tank and the rooftop solar collectors.

In general, solar water heaters can be used anywhere as long as your roof gets direct sunlight for most of the day. The rooftop collectors should face south. A direct system makes sense in warm climates where temperatures don't fall below freezing. The non-freezing liquid used in an indirect system makes it better suited for cold climates.

You'll need to retain your conventional water heater as a back-up at night, on cloudy days, or anytime a solar water heater's capacity is exceeded. An average person uses about 15 to 20 gallons of water per day, so a family of four would likely need an 80-gallon water heater tank.
The cost of a solar water heater
A solar water heater starts at around $4,000 including installation, though the price tag could double depending on the size, quality, and complexity of the system. Figure it'll take two to four days to install.

There's no cap on the 30% federal tax credit, which applies to systems placed in service between Jan. 1, 2009, and Dec. 31, 2016. Solar water heaters must be certified by the Solar Rating & Certification Corp. (http://www.solar-rating.org/) to qualify. States may offer additional incentives. Check the DSIRE database (http://www.dsireusa.org/).

To earn the federal tax credit, at least half of your household's energy for water heating must come from the sun. You can only count money spent on the solar water heater, not the entire heating system. You can't claim the credit if the solar water heater is for a pool or hot tub.

Take the credit on IRS Form 5695 for the year you install the solar water heater. Remember to save receipts and manufacturer certification statements. The credit can't exceed the total amount you owed in federal taxes for the year.
The savings can add up
According to Energy Star, a federal program that promotes energy efficiency, a solar water heater can lower the average household's water-heating costs (http://www.energystar.gov/index.cfm?c=solar_wheat.pr_savings_benefits) by 50%. If you use a gas water heater, that translates to savings of $190 a year. You'll save $265 annually if you have an electric water heater.

Savings are greater for large families that use a lot of hot water. How quickly you recoup your total investment depends on how much water you use, the amount of sun you get, the performance of your solar water heater, and how much it costs to heat up your water using your existing system.

If you're building a new home or refinancing your mortgage, consider lumping in the cost of a solar water heater with the loan. By spreading the cost (http://www.energysavers.gov/your_home/water_heating/index.cfm/mytopic=12860) of the system over the life of your mortgage, you can take advantage of the tax deduction (http://www.houselogic.com/articles/deduct-interest-home-equity-loans/) for mortgage interest.

According to the U.S. Department of Energy, you'll pay an extra $13 to $20 per month to include the cost of a solar water heater in a 30-year mortgage. With the mortgage interest deduction that cost gets reduced by $3 to $5. The difference is about what you should save on your monthly energy bills.
Long life, little TLC
Solar water heaters have a life expectancy of 20 years or more, double that of conventional storage tank water heaters. They typically don't require replacement parts for the first 10 years. It's prudent to hire a qualified contractor to conduct annual inspections, as you might do with a furnace.

You can do your part by making sure the collector is clean, sealings aren't cracked, and fasteners connecting the collector to the roof are tight. Whether for installation or maintenance, look for contractors certified by the North American Board of Certified Energy Practitioners (http://www.nabcep.org/).

Solar water heaters not only save money-they save the environment. The DOE says a solar water heater can cut the electric load of your water heater by 2,500 kilowatt hours annually, which prevents 4,000 pounds of carbon dioxide from entering the atmosphere. That's equal to not driving your car for four months a year.
This article provides general information about tax laws and consequences, but is not intended to be relied upon by readers as tax or legal advice applicable to particular transactions or circumstances. Readers should consult a tax professional for such advice, and are reminded that tax laws may vary by jurisdiction.
Donna Rivera has written about alternative energy for Dow Jones, the Wall Street Journal, and Fox Business News for more than a decade. She's currently renovating her house with an eye toward energy efficiency and green technologies.

Evaluate Your Adjustable-Rate Mortgage

Published: December 28, 2009

If you have an adjustable-rate mortgage, be sure to investigate your loan options well before the rate on your ARM resets.

An adjustable-rate mortgage, or ARM for short, is attractive to homeowners because the introductory interest rate is often lower than rates on traditional fixed-rate loans. That translates into lower monthly payments. ARMs can make sense if you plan to sell your home or refinance your mortgage before the introductory rate expires.

Just keep in mind that there's no guarantee you can sell or refinance in time, especially if real estate markets are depressed or the lending environment is tight. If you're a current homeowner with an ARM, look into your loan options long before the rate resets. A day spent investigating alternatives could save you thousands.
Get to know your ARM
Review your ARM's original paperwork to familiarize yourself with the conditions of the loan. Focus on these four areas as you go through the documents.

Index: Lenders use a widely followed index as the basis for the interest rate you pay on an ARM. A common index is the London Interbank Offered Rate (http://www.investopedia.com/terms/l/libor.asp), or LIBOR, the rate major world banks charge each other for loans.

Margin: This is the percentage you pay above or (rarely) below an index. "LIBOR plus 2," for example, means you'll pay an interest rate two percentage points above LIBOR. If LIBOR is 4% and your margin is 2%, then your mortgage rate is 6%.

Interest Rate Cap: This limits the amount your rate can increase in a given timeframe. Periodic caps govern how much your rate can increase from one period to the next, such as from year to year. Lifetime caps set the maximum amount the rate can rise above the introductory rate during the loan's duration.

Adjustment Period: This is how frequently your rate changes.

Once you understand the terms of your ARM, think about how long you plan to live in your home. If it's less than five years, then you may benefit from refinancing into another ARM. If you hope to stay in your house for the long haul, a fixed-rate mortgage may be a better deal for you.
Evaluate your refinancing options
Now it's time to consider what actions to take before your ARM resets to a higher interest rate. Start by determining your monthly payment once your introductory rate expires. An online ARM calculator (http://www.dinkytown.net/java/MortgageAdjustable.html) can help. If you can handle the new payment, then your job is done. But if it's more than you can afford, explore alternatives.

A common tactic is to refinance into a loan with a lower monthly payment. Look into 15- or 30-year fixed-rate mortgages, since the payments will be steady and predictable. Also explore a new ARM, such as a 5/1 ARM, which can also have a 30-year term but offers a low fixed rate for five years before resetting in the sixth year. Use this worksheet (http://www.federalreserve.gov/pubs/arms/checklist_english.htm) to keep track of loan terms and compare mortgages, both adjustable and fixed, to each other.

Let's say you need to refinance a $200,000 loan for 30 years. According to the U.S. Federal Reserve (http://www.federalreserve.gov/pubs/arms/arms_english.htm), a 30-year fixed-rate mortgage at 6% interest will cost you $1,199 a month. If you refinance into a 5/1 ARM with an introductory 4% rate, monthly payments for the first five years will be $955. Saving $244 a month--or about $14,640 over five years--sounds hard to beat, right?

The problem is, the monthly ARM payment can increase starting in the sixth year. Assuming the periodic rate cap is 2%, the rate may rise to as high as 6% in Year 6. At that point, your payment would go up to $1,166, which is still $33 less than the 30-year fixed. In Year 7, though, you could get hit with another 2% rate increase. That would bump your payment up to $1,390, or $191 more than the fixed-rate amount.

It can get worse if you're living in a rising-interest-rate environment. If the lifetime cap on your loan is 8%, your rate could eventually be as high as 12%--the introductory 4% plus 8%--yielding a monthly payment as high as $1,865. That's nearly double the introductory payment. Suddenly, that $1,199 payment on a 30-year fixed looks pretty good if you're planning to own your home for a long time. If you plan to sell within five years, the ARM is a better choice.
Face the realities of refinancing
Refinancing an ARM isn't free, so take into consideration closing costs and breakeven points. You might save $200 a month with a refinance, but if the upfront costs are, say, 5% ($10,000 on a $200,000 loan), you wouldn't break even for a full 50 months. The Federal Reserve says typical closing costs on a refinance range between 3% and 6%. Also make sure there's no prepayment penalty on your ARM, or you might find yourself eating that cost as well.

As you evaluate your options, be realistic about the future. Is your job secure? Will late payments or too much debt hurt your credit score? Could lending markets turn so tough that even borrowers with outstanding credit can't get loans? These scenarios might prevent refinancing indefinitely.

Take safeguards just in case you find yourself on the losing end of an ARM gamble. Start by setting aside a portion of the money you're saving on an ARM during the introductory period. That way, if the ARM resets before you can refinance, you can use the savings to pay down your principal. That should lower your monthly payment, even with a higher interest rate. When needed, cut expenses or generate extra income to eat away at your loan balance.

Accept the fact that you may have to sell your property. Use the proceeds to purchase a less expensive home, or rent until you're in a better financial position. If you absolutely can't meet your monthly payments, and you can't sell, then talk to your lender about a loan modification (http://www.houselogic.com/articles/making-home-affordable-modification-option/).

Barbara Eisner Bayer has written about mortgages and personal finance for the past 15 years for Daily Plan-It, Motley Fool, and Nurse Village, and is the former Managing Editor of Mortgageloan.com and Credit-land.com. She enjoys the flexibility of adjustable-rate products, but is temperamentally a fixed-rate kinda gal.