Category: Finances

Canceling Mortgage Escrow Account

lpaulriddle

A couple years ago, I wrote about how my mortgage company consistently mis-calculated my monthly escrow payment, arriving at figures that were either too high or too low, depending on the time of year the escrow analysis was done.   Well, this past summer, the mortgage company ran another analysis and again came up with a figure that would have had me paying too much into escrow.  When this has happened in the past, we’ve called them and had them correct it, a process which typically involves sending a fax and spending about an hour on the phone.  This year, though, we decided to ask them what it would take to waive the escrow requirement on the account.  I figured that I’m responsible enough to set aside money for insurance and taxes on my own, and I stay on top of our local property tax rates, so I can do a better job anticipating these expenses than the mortgage company can.

Canceling the escrow account was easier than I had anticipated.  There were, however, a bunch of prerequisites.  Going from memory, they were:

  • A 12-month history of no late or missed payments
  • A 75% loan-to-value ratio (in other words, you need at least 25% of the property’s appraised value in equity)
  • No escrow disbursements due in the next 60 days

When we initially called, they checked to ensure that we met these requirements, then they mailed us a waiver which we needed to sign.  This arrived after about a week.  We signed it and faxed it back to them (along with a brief cover letter).  Within 24 hours of sending the fax, they had canceled the escrow account.  After another week, we received a check for the balance of the account.  All in all, it was straightforward and painless, and now they just bill us for principal and interest each month.  For taxes and insurance, we set money aside separately each month, which we can now do accurately, setting aside only what’s needed.

We were happy that our mortgage company was willing to waive the escrow account without too much fuss.  If you’re in a similar situation, you might consider checking with yours and see if they’ll work with you.  If not, there’s always the option of refinancing into a mortgage with no escrow account.  At today’s interest rates, that may make sense for a lot of people; in our case, the interest savings would only barely outweigh the closing costs, so for now, it was easier to waive the escrow account and stick with our current mortgage.

Maxing Out on Credit Card Reward Cash

lpaulriddle

I’ve always been a big fan of credit cards that pay cash rewards.  Pay the balance off in full each month, collect the free money – what’s not to like?  I started out in the early 90s with a Discover card, which was one of the first to offer cash back rewards.  Then in 2004, I switched to the American Express Blue Cash card.  Up to now, the Amex has been my main credit card except for places that don’t accept it.

Both Amex and Discover have “tiered” cash back programs.  The cash reward is a percentage of overall spending, and for both these cards, it’s a very small percentage until you meet a preset spending tier.  Then it increases.  Amex also pays a greater percentage back for certain purchase categories that Amex deems “every day purchases,” like grocery and drug stores.  Specifically, Amex pays 1% back for “every day purchases” and 0.5% for everything else until I reach $6500 in purchases.  Then it jumps to 5% for “every day” and 1.25% for everything else.  But what really matters is the bottom line: how much cash back do I earn in a given year vs. what I spend on the card?  With Amex, it typically works out to around 1.5%.  This will be different for different people; in particular, the more you spend in a year, the higher the percentage will go, particularly if a lot of the purchases fall into the “every day” category that earns 5%.  But in my case, the bottom line has hovered around 1.5% every year.

I’m always looking for a better deal, which means that if I can find a card that nets better than 1.5%, I’m going to check it out.  A few months back I read about the Schwab “Invest First” Signature Visa, which pays unlimited 2% cash back, so I signed up for the Invest First card and will now be using that instead of the Amex.

But there’s still more.  It turns out that my old Discover card, which I haven’t used in 5 years, has a 5% cash back program where certain purchase categories earn 5% back on up to $400 in purchases.  The categories change every 3 months, but as long as I stay on top of things, I can earn even more cash back by strategically using my Discover card.  With the combination of that and the Schwab card, my annual cash rewards should exceed 2% of purchases.

The bottom line:

  • Look for cards that pay cash rewards with no annual fee
  • Pay card balances off in full every month to avoid finance charges
  • After each year, figure out the “bottom line” percentage of cash back earned vs. total spent, and choose the card(s) that maximize that percentage for your own individual spending habits

I’m sure I’m not the most popular guy with the credit card companies, but as long as they keep offering the rewards, there’s no reason not to take advantage of them.

Mortgage Escrow Follies

lpaulriddle

A year or so back, the mortgage on our primary house was sold to CitiMortgage.  Prior to this happening, I was aware of quite a number of horror stories about CitiMortgage, so when the sale was announced, I was a little apprehensive.  However, one thing I’ve learned over the years is to always look at the big picture.  The nature of these things is that people who have problems tend to complain the loudest, so for every one person complaining about CitiMortgage on the Internet, there are probably hundreds who are not having problems.  Still, there are disproportionately more horror stories floating around about CitiMortgage than about other mortgage companies, which is a little troubling.  All the same, I gave them the benefit of the doubt.

After a year, the verdict on CitiMortgage is neutral.  The loan transfer went off without a hitch, with no mistakes on the principal, interest, and amortization side of things (kind of hard to screw up a simple 15 year fixed-rate loan, I would think).  They also made two interest credits to the escrow account, which was a pleasant surprise, although I’m assuming they were one-time credits as there have been none since (Maryland does not require lenders to pay interest on escrow balances, so I’m wondering if this was one of the terms of the loan sale or something — haven’t bothered to investigate).  To date, all of our escrow transactions (property tax and hazard insurance bills) have been processed correctly and on time.

There’s been one little hiccup to the whole CitiMortgage experience, related to the annual escrow analysis process.  First, some background.  Our property taxes come due semiannually, as is the case in many municipalities.  However, they’re not billed in equal installments — the first installment (due in July) is always several hundred dollars more than the second (due in December).  I’m not sure how common this practice is.  But in any case, most mortgage companies I’ve dealt with take a full year’s worth of past tax payments into account when running an escrow analysis.  CitiMortgage, however, assumes that the tax is billed in equal installments, and only looks at the most recent tax payment during the escrow analysis.  They then use this amount to project both semiannual tax payments for the coming 12 months, and as a result, their numbers are always wrong.

Depending on what time of year they run the escrow analysis, this can be good or bad.  CitiMortgage ran our first escrow analysis in January 2008, right after they paid the (lower) December property tax installment out of escrow.  They then used the lower December amount to project both the July 2008 and December 2008 payments.  The result was a lower-than-expected monthly escrow payment, which is great (as long as there’s still enough in the escrow account to cover the bills — you never, ever want your escrow balance to go negative).  However, CitiMortgage caught onto this in July, when the tax payment was much higher than they had projected.  This triggered another escrow analysis in July.  This time, they used the July amount to project payments in December 2008 and July 2009, which resulted in a monthly escrow payment that was too high.

Now, it’s nothing personal, but if CitiMortgage underestimates my monthly escrow payment, and there’s still enough in the account to pay the bills, I’m certainly not going to call it to their attention.  In the opposite situation, though, I’m always going to call them on it, because I don’t want to pay more than necessary into a non-interest-bearing escrow account.  So, when we got the second escrow analysis statement, we got on the phone with them.  They told us to fax them a copy of our property tax bill, showing the correct amount due for December, which we did.  This didn’t produce any action for two weeks, though, so my wife called them again.  This time she reached a supervisor who acknowledged receipt of the fax, re-computed the escrow, and adjusted our monthly payment on the spot.  So the two weeks of inaction was a little questionable, but the followup call produced an immediate resolution.

I was recently reading some of the FAQs on CitiMortgage’s web site (I’d provide a link, but it appears you need to be signed in to get at the FAQs) and it turns out this process is documented there.  Here’s an excerpt, with the relevant bit in bold:

We automatically adjust your escrow payment one time a year to reflect changes in your escrow related items. If you would like us to complete an interim adjustment, please send official documentation of the new tax amount to our Tax Department at:

CitiMortgage, Inc.
Attn: Tax Dept.
PO Box 23689
Rochester, NY 14692
Please write your account number on the documentation.

If this happens again (and I’m assuming it will) I may try sending my request to them via certified mail, with the thinking that it’ll be more effective than a fax.  Either way, though, it seems we should be able to get it rectified with a letter/fax and possibly a single follow-up phone call.  Time will tell.

If this little snafu unfolds the same way every year, it will result in a lower average escrow balance over time, because our escrow payment will be lower than it should be for the first half of the year.  The price of this is the hassle of getting the payment corrected after it’s overestimated in July.  Yet another reason to try and pay off the mortgage early, I guess 🙂

And finally, some parting advice:

  • Stay on top of things.  Monitor your escrow balance and activity at least monthly.  Make sure there is always enough in it to cover the bills.  Ensure that the mortgage company is paying the bills in a timely fashion.
  • Understand how mortgage companies compute escrow payments.  It’s a simple formula, and every mortgage company uses it. If you know it, you can double-check the mortgage company’s numbers and call them on any errors.

Tax planning 101…

lpaulriddle

OK, so our 2007 taxes are done. Up till now, taxes were always something I did after the end of the tax year. At that point, all the forms are available from the relevant taxing authorities; tax software is available; I know exactly how much we made, how much we paid in taxes; etc. So with all the ducks in a row, I would typically knock off a given year’s taxes by the end of January of the following year. Now, I’ve decided to take this a step further, and turn taxes into a kind of ongoing thing that I work on over the course of the tax year. Being the obsessive financial control freak I am, this is always something I have wanted to do, but it’s always seemed prohibitive. Estimating the current year’s income is not a big deal and can be done with varying degrees of accuracy, depending on how much time you want to spend. But what about tax forms, software, etc.? These are typically not available until late in the tax year. So how do we do this? Enter the spreadsheet.

I’ve always used tax software to prepare our taxes. Tax software is great for what it does: it streamlines the tax preparation process, generates IRS-friendly hardcopy, and facilitates e-filing. Where it falls short, IMO, is in its ability to play out “what-if” type scenarios. What happens if I use FIFO vs. average cost in computing a capital gain? What would happen if I take the standard deduction vs. itemizing? How close am I to getting tripped by the AMT? etc. I want to be able to tweak certain numbers on my forms, and instantly see the end result in taxes owed, refund, etc. With tax software, I have always found it cumbersome to go through, tweak things like this, and see the results. This is the kind of thing a spreadsheet excels at (no pun intended). So, for 2007, I took the plunge and wrote up a spreadsheet to do my initial tax calculations, falling back on the tax software to verify that my numbers are correct. It wasn’t too hard, and I really like the instant gratification I get from changing one number and immediately seeing the result. I also realized something else, after using software exclusively for so many years: doing the spreadsheet really gave me a better feel for how the tax code works, and why certain things are the way they are. Software, by its design, insulates the user from a lot of what is happening behind the scenes. This is good in some ways but bad in others.

After the initial spreadsheet exercise, I realized that the spreadsheets would also be useful for tax planning during the current year. The key to this is keeping up with changes to the tax laws since the previous year, and adjusting the spreadsheet to accommodate them. Most years, there aren’t many changes. The IRS re-indexes the tax brackets every year for inflation, which changes the tax tables as well as employer withholding tables. Using this data, one can compute paycheck withholding and come up with a pretty clear picture of salary income for the coming year. Projecting the other stuff (investment income, etc) involves a bit of hand-waving, adjusting various things to account for inflation, etc. The important thing to keep in mind is that most peoples’ tax situation does not change much from year to year. As the year progresses, I’ll just keep updating the spreadsheet to replace projected numbers with real numbers.

Doing this opens up a lot of planning possibilities. I now have a much clearer picture of how many withholding exemptions to claim on my W-4, and as the numbers become more accurate over the course of the year, I’ll be able to do more accurate year-end planning too. And, my taxes will be more-or-less finished at the end of the year.

This exercise has already helped me out this year. It alerted me that I’m losing a capital-loss write-off that I’ve been able to claim for the last few years (since selling off some of my wife’s really bad mutual funds :-)). Well, after several years of carryover, I’ve finally churned through the loss, and will flip back into the black in 2008, losing the write-off and creating an extra several hundred dollars in tax liability. So, time to bump down the withholding exemptions and tighten the belt a bit. Better to know that now, then get surprised with a huge tax bill (complete with penalties etc) next year.

Taxes, painting and stuff

lpaulriddle

It’s been a while since I wrote anything here, mainly because I have been swamped at work, getting ready for a presentation next week at Educause, my first foray into public speaking since, oh, 1995 or so. That was back in the days of transparencies, so it’s been a while. And I do have to say, there are much better tools around for preparing slides nowadays. But anyhow, it’s been pretty all-consuming writing up this presentation, and by the time I get home I haven’t been much in the mood to write anything else.

Interesting tax-related development here in the People’s Republic of Maryland. It seems that the legislature has raised the personal exemption amount for 2008 a whopping 33%, from $2400 to $3200. This is the first time Maryland’s personal exemption amount has changed since 2002, when it rose from $2100 to $2400. Apparently this is the legislature’s way of providing relief to the “working families” they are always harping about. This is in contrast to the governor’s original plan that would have widened the lower-income tax brackets, and being a flat tax advocate, I think it’s a better idea, although it benefits fewer people. For a typical family of four (like us.. imagine that) this results in $3200 less taxable income in 2008 than in 2007. Maryland has also completely overhauled how they figure payroll withholding. For me, that resulted in about $27 less state tax being withheld from my paycheck. This seems like a lot. According to my handy spreadsheet, an exemption amount of $3200 would have resulted in $254 less in taxes owed in 2007. Extrapolating the $27 withholding difference out to 26 paychecks results in $702 less tax withheld in 2008, leaving me $448 in the hole. There must be something I’m missing here, or I’m going to have to tweak my withholding exemptions again.

In other, less exciting news, we are finally getting ready to paint the master bedroom, several years after buying the paint. In preparation, I’m putting in a new phone jack. The original jack was one of those “woodwork warts” that was surface-mounted to the trim. I hate these, so I’m getting rid of them as we paint the rooms, in favor of flush-mounted wall jacks. This will be the first phone jack I’ve rewired, so I’m going to do it right and use twisted-pair cable with a Leviton “QuickPort” punch-down type jack. In the basement, I’ll install either a patch panel or a 66-type punch-down block (haven’t decided which yet) and splice it into the old quad-conductor cable that makes up the rest of the house’s phone wiring. Then as I replace jacks down the road, I’ll replace the quad with Cat-5. Doing this might improve our DSL speeds, too.

Tax Time Again

lpaulriddle

You know you’re a financial geek when you’re working on taxes a full 4 months before they’re due, and before the tax year in question has even ended. The People’s Republic of Maryland hasn’t even released its 2007 tax forms yet, so for now, I’m working on fed.

This year, for the first time, I’m taking the true hard-core accounting geek route of using a spreadsheet to do our taxes. It really hasn’t been that hard, and it allows me to play out some “what-if” scenarios that would be hard to do with canned tax software. When it comes time to file, I’ll use TaxACT for federal and Maryland’s iFile for state, both of which are free. When all is said and done, I’ll have a set of spreadsheets I can use every year with only (hopefully) small modifications. The spreadsheets will also help me do more accurate tax planning throughout the year.

Last year’s tax planning appears to have had the desired effect: It looks like we are going to owe money rather than getting a refund. I’ve set aside money to cover the taxes owed, and it’s been spending the year earning interest for us rather than Uncle Sam. We are actually going to owe a little bit more than what I had planned, because of Cathy’s extra income from child care. I think we’re still below the penalty threshold, but for 2008 I may want to increase my withholding just a tad.

Last week, H&R Block sent me a TaxCut 2007 CD in the mail. They want $40 for the “premium” product that includes state, but no free e-file. Unfortunately, TaxCut is not nearly the deal it was up till a couple years ago, when I last used it. Back in the day, it cost $20-$25 and included free federal e-file. When the price jumped last year, I switched to TaxACT and was pretty happy with it. I did notice that Block is now giving away their DeductionPro software, so I grabbed a copy to help tally up all of our non-cash donations.  The software still works OK, but the UI is not as nice as it was in past years (in particular, I couldn’t find a feature to search for an item).  I guess you get what you pay for.  In any case, I do applaud them for making this available for free, as it does save me some work.

Let’s go paperless

lpaulriddle

I’m on a paperless kick. I’ve decided that I have too much paperwork cluttering up my file cabinets, desk drawers, etc., so I’m getting rid of as much of it as I can. My goal is to shrink my paperwork collection down so that it only takes up one file cabinet (I currently have three). It’s one part of an overall downsizing theme that’s pervading our household lately, the idea being that if we get rid of as much stuff as possible now, it’ll be easier to move into a smaller, lower-maintenance house down the road.

It’s also getting easier to go paperless. More and more billers, financial institutions, etc. are offering electronic (usually PDF) statements with the option of turning off paper mailings. It took me a little while to warm up to this technology, but now I’ve accepted it wholeheartedly (the key was deciding that I trust the online delivery mechanism more than I trust our mailman).

The centerpiece of the paperless scheme is what I call a “virtual file cabinet”, which is just a fancy name for a directory hierarchy to hold PDF documents. I use ‘unison’ to keep an exact copy of the hierarchy on a different machine, which serves as an effective backup scheme.

I’ve centered on PDF as my document format of choice, because it works well and is used by the majority of the e-document providers I deal with. And that means that everything that is not PDF, has to be converted to PDF. The best way I’ve found to do this is to set up a virtual “PDF Printer”, which creates a PDF file in lieu of actually sending the document to the printer. Then, just send the document to the virtual queue to create a PDF. This saves a step over printing the document to a file (which creates a PostScript file which then must be converted with ps2pdf). And some apps, like H&R Block’s TaxCut, don’t allow printing to a file, but they’ll happily send stuff to the PDF queue.

Setting up the PDF printer on my Ubuntu machine was a piece of cake, following these instructions. Condensed version:

  1. sudo apt-get install cups-pdf
  2. sudo chmod 4755 /usr/lib/cups/backend/cups-pdf
  3. Go to System -> Administration -> Printing -> New Printer
  4. Select ‘PDF Printer’
  5. Select ‘Generic’, ‘postscript color printer’ driver

It was a little more difficult, but not overly so, to set this up on my home server box (and also configure our Windows box to print to it). See the Wiki for details.

XP and QEMU

lpaulriddle

Last week I decided to try building a virtual machine to run Windows XP. I figured I’d install XP, install all the recent patches, then make a snapshot of the virtual disk. Then I’d have a clean XP install that I could use to run various apps as needed. Several years back I purchased a copy of VMWare for this purpose, and it worked great. This time around I figured I’d try QEMU, an alternative emulator that’s free. Now, I’ll prefix this by saying that my host machine (a Debian Linux box) is somewhat underpowered to run an XP guest OS. It’s a 700mhz PIII with 512 megs of RAM. It works, and it’s usable, but it’s quite comically slow. In particular, I’d estimate that the installation process took about 12 hours (this was spread out over several days of occasional attention, so I don’t have an exact figure). The basic XP install goes something like:

  1. Install XP from CD.
  2. Install Service Pack 2.
  3. Download and install recent updates from Microsoft to bring the installation completely up to date.

And that’s essentially what I did. The process was marked by long periods of waiting and wondering if it was hung, followed by entering some info in a dialog box, follow by more long periods of waiting and wondering if it was hung, etc. etc. etc. I ran into a couple of known QEMU/XP issues:

  • After the initial install, the reboot hangs on the “Windows XP” splash screen with the message “Please Wait”. Resetting the machine at this point seems to get it moving along again.
  • After initially logging in as “Administrator”, I got a dialog box that said “A problem is preventing windows from accurately checking the license for this computer. Error Code: 0x800703e6.”. Following some advice on the qemu-devel mailing list, I booted into safe mode and installed Service Pack 2, and that fixed this problem.

After that, there was lots more waiting while it downloaded updates, installed IE7, etc. etc. etc., but it eventually finished and left me with a working system. How much use I get out of it remains to be seen, but at least all the effort wasn’t for naught. Recommendation: if you’re going to do this, use a beefier machine than I did 🙂 Also, I highly recommend building and using the kqemu kernel accelerator module. For me, this sped things up from “super mind-numbingly comically slow” to just “comically slow.” And the final tip: If you think it’s hung, go to the host OS and check for activity on the virtual disk image. I lived by this during the install.

And in other news… it’s tax time again! And, this year I’ve decided that I’m tired of getting refunds. Even a “nominal” refund (say $100-$200) is still an interest-free loan to Uncle Sam. So it occurred to me, why don’t I just estimate our 2007 taxes and adjust my withholding appropriately so that I end up owing a nominal amount, instead of getting a nominal refund. Then, with each paycheck, I’ll set the extra amount aside in an interest-bearing account. When next year’s tax season rolls around, I’ll pay the amount owed, and the remainder becomes my “refund”. Seems like a no-brainer, and I wonder why I didn’t come up with this sooner. The complicated part, of course, is estimating our 2007 taxes and avoiding the whole underpayment/penalty/interest thing. But I’m going to give it a go.

Bye-bye Taxcut, hello TaxACT

lpaulriddle

Don’t look now, but it’s Tax Season again. This is usually the time of year I start looking for the best deal on H&R Block’s TaxCut product, which I’ve been using for several years. Truth be told, I’ve always been pretty happy with TaxCut. I usually pay between $15 and $25 for the “Deluxe” product (or whatever they’re calling it in the given year) which in the past has included “free” federal e-file and one “free” State (after rebates of course). However, this year it appears that Block is no longer offering the free e-file, so that prompted me to look around for a better deal.

To me, there are three important things to consider when choosing a tax preparation product:

  • Convenience. I’m sure I could use the old paper-and-pencil method, maybe with the help of a spreadsheet or two. But truth be told, that’s not really an option for me at this point of my life. It’s just too tedious and time-consuming. Tax preparation software is well worth a (nominal) price in terms of time and headache saved.
  • Accuracy. Obviously, the software isn’t worth anything to me if it doesn’t accurately complete the return.
  • Cost. The cheaper, the better.

Anyhow, I think I’ve found what I’m looking for: TaxACT online for Federal, and Maryland’s free (and excellent) iFile system for State. TaxACT will supposedly complete and e-file my Federal return for free, so combined with iFile, my total outlay this year will be a grand total of…. $0! And no rebates to bother with, either. Time will tell how well this works, but it sure seems ideal, so I’m hoping it works out. Stay tuned.

Late Christmas Present

lpaulriddle

Got a late Christmas present yesterday from an unlikely source: my employer’s 401(k) provider. Well, it actually came in early October, but I didn’t notice it until the other day when I checked my quarterly statement. Now, the plan has always had a decent selection of investment choices, but there have always been a bunch of things that bother me about it…

  1. The plan has a board of trustees that determine the investment choices, and the board has a habit of eliminating various mutual funds (replacing them with others) after relatively short periods of underperforming.
  2. The investment options are mainly regular, non-proprietary mutual funds with ticker symbols, etc. However, the provider, being an insurance company, feels the need to treat the funds as annuity investments, and tracks them using its own ‘unit’ system rather than using the funds’ actual NAVs.
  3. The fees are higher than they should be (although the provider passes on some mutual fund management fee reductions it negotiates, and these offset the provider’s fees somewhat, though not nearly enough).
  4. The quarterly statements have never made sense. The number of ‘units’ owned never adds up to the sum of ‘units’ purchased with each deferral to the plan. This, to me, has always been the biggest problem with the plan. It makes it impossible for me to (properly) track my account with my financial software, and leaves me wondering what’s actually going on behind the scenes.

Anyhow, in early October the provider quietly took a huge step in the right direction by abandoning its unit scheme and switching to a share-based valuation system using the funds’ actual NAVs. All of a sudden, the statements make complete sense, and I can track my account day-to-day because the fund NAVs are available online.

I still think the fees are too high, but I have to say I’m much happier with the plan now.