Eight 2007 New Years Resolutions for American Homeowners

One of the best New Years Resolutions you can make is to get your personal financial affairs in order.

This is a tall order for many of us, with implications ranging from how you finance your mortgage to the energy efficiency of your home. Nevertheless it’s a very worthwhile exercise which will affect your wallet and much more. Many have already made some of the following eight 2007 New Years Resolutions for American Homeowners, but few have addressed them all. We challenge you to adopt all of them!

Resolution #1: I will get my home finances in order.
Mortgage interest rates are low, so this is a good time to review how you are financing your home. You may be able to save money, reduce financial risks, improve your financial status and/or use the opportunity to incorporate home financing in your long term financial planning.
If your mortgage is more than a few years old there’s a pretty good chance you can get a lower mortgage interest rate – and therefore lower monthly payments if you refinance your mortgage. Because most of your mortgage payments in the early years consist of interest, you may also end up with a larger tax deduction. Also, for the first time, the cost of private mortgage insurance (PMI) will also be tax deductible for mortgages originated in 2007.

If you have an adjustable or interest only mortgage you have done well in this period of low mortgage interest rates. But don’t assume that your good luck will continue. The increase in monthly payments could be frightening when mortgage rates increase in the future. This may be a good time to refinance to a safer fixed rate mortgage if your current income will qualify you for monthly payments. If the monthly payments on a fixed rate mortgage are unaffordable you could have a problem in the future. In such cases you can at least stave off the risks of a substantial increase in your mortgage payments for another couple years by refinancing with another adjustable or interest only mortgage.

You can take cash out for worthy uses such as remodeling when you refinance your mortgage. If you have substantial high interest credit card debt (which isn’t tax deductible) and/or a short term second trust on your home it may make sense to use the proceeds to retire it with the proceeds as well. However, there are limits on the mortgage interest deductibility if you refinance for more than the original cost of the home plus improvements. Check with IRS (www.IRS.gov or 800-829-1040) or your tax advisor to make sure you understand the limitations before you take cash out.

Resolution #2: I will stop lending the government money interest free.
More than 101.2 million taxpayers got more than $229 billion in income-tax refunds in 2006. The average refund was $2,264. Refunds from IRS may sound like good news, but the IRS doesn’t pay you interest on that refund, which accumulates throughout the year. Those taxpayers would have been better off if they reduced the amount withheld from their income tax every paycheck enough to break even with IRS at years end and put the resulting paycheck increases into investments that earn interest or dividends. However, if those homeowners have substantial credit card debt they are probably paying high interest on that debt, and credit card interest payments aren't tax deductible. In such cases it would probably make even more sense for a homeowner to use the extra money to gradually reduce their credit card balances rather than to invest it.

Some saved their income tax refund but others blew it on things they could live without. That’s a big mistake. Another alternative is to have IRS automatically deposit a portion of your refund directly into savings accounts. Go to www.IRS.gov or call 800-829-1040 for details.

Resolution #3: I will increase my saving and reduce or eliminate high interest loans.
Refinancing your mortgage is often the first step in this process (see Resolution #1), and curtailing your interest free loans to IRS the second (see Resolution #2). Next make sure you are taking advantage of all matching employer contributions to a company IRA if you have one and if at all possible make the full tax deductible contribution to your 401k, 403(b), regular or Roth IRA, or other tax-deferred retirement accounts in 2007.

In order to pay their mortgage off sooner many homeowners make additional payments above the required monthly amount to their mortgage lender. Not that its bad to reduce any debt, but many would be much better off from a financial and tax standpoint to instead put the same amount into a tax-deferred retirement accounts. Not only would they get employer contribution matches in some cases, but the accumulated interest or dividends will either be deferred or tax free until they withdraw them at retirement. A recent study found that more than 38% of households would have earned 11 - 17 cents more on the dollar by investing in tax-deferred retirement accounts instead of prepaying their mortgage. Those extra earnings would have resulted in additional annual savings of almost $400 per household. Those benefits have to be weighed against the peace of mind that comes from a paid off mortgage. That peace of mind can mean a lot to a mid-career factory worker whose employer is about to close the factory.

Diversify both your tax deferred accounts and investments, including investments in your employers stock. Even sound, well managed companies can take a beating in the stock market. Make sure you invest in mutual funds or stocks with consistently good performance records. For example the Lipper Reports tracks mutual fund performance by category (i.e. large caps, energy, etc.) over 1, 3, 5, and sometimes even 10 years. If there are 100 funds in that category invest only in those that are consistently in the top quartile (which would be the top 25 if there are 100 funds in the category) over each of those periods and you should do pretty well. Review your investments annually (or even better quarterly) against that standard to make sure they are maintaining their track record.

Review your annual Social Security Benefits Statement to make sure that your earnings have been accurately reported and that no one else is using your Social Security number. If others have been your Social Security number there's a risk that they may also use it to get a drivers license and credit cards in your name as well. You can order your statement online at www.ssa.gov.

Resolution #4: I will review my homeowners and other insurance to make sure I’m adequately protected.
Review your coverage with your agent to make sure you have enough insurance. The insured value of your home should reflect its current replacement value, including any additions or improvements, as well as the value of its contents. Make sure you are covering all important circumstances. Insurance against flooding may not cover internal drainpipe backups or wind damage during a hurricane for example, and many insurers won’t provide flood insurance if your home is in a coastal area or river basin (in the latter case you may be able to get flood insurance through the National Flood Insurance Program). Many policies also have standard fixed limits on certain types of contents (jewelry and furs, antiques, cameras, electronics, etc.) so you may need an additional “floater” policy to fully insure your home’s contents.

Life insurance needs change throughout your life. They are highest for young couples with children, far less for empty nesters with enough savings for their retirement. Depending on your situation you may be able to cut back on insurance costs.

Resolution #5: I will reduce my homes energy costs.
There are many ways to reduce your home energy costs. The American Homeowners Foundation has a free home energy audit. All it takes is a ten minute tour of your home with the audit questionnaire and a few simple tools you probably already have, and you will likely find numerous ways to reduce both your energy costs and global warming. For a free copy send an email with “Free Energy Audit” in the subject line to AHF@AmericanHomeowners.org, and we will email you back a free copy.

Among some of the “no-brainers” to save energy are replacing old manual thermostats with programmable thermostats, which typically will pay back their costs in several months, and replace standard light bulbs with compact fluorescent bulbs, which have dropped in cost recently. Also make sure your exposed hot-water pipes are insulated, furnace filters are changed regularly, leaky faucets are repaired, and run only full loads in the dishwasher.

Resolution #6: Whenever appropriate I will take advantage of new options to reduce real estate services costs when I buy or sell a home.
Internet-based real estate service companies will provide rebates of as much as 2% of the selling price of the home you buy if you use them to assist you in your home purchase (state real estate associations have managed to make real estate commission rebates illegal in several states, but the U.S. Department of Justice, the Federal Trade Commission and consumer groups like the Consumer Federation of America and the American Homeowners Grassroots Alliance are working to repeal those laws). Try to get an exclusive buyers agent (EBA) to represent you when you buy a home. EBAs only represent buyers, never sellers. In many states the state real estate associations have also managed to convince their legislatures to allow traditional real estate brokers to simultaneously represent both the buyer and the seller of the same home, creating a potential conflict of interest you want to avoid if possible.

With the market as soft as it is, buyers should consider selling their present home before buying its successor. There’s a large inventory of unsold homes in most areas, so finding your next home shouldn’t be a problem. Selling your current home will probably take much longer, especially if you don’t want to be forced to accept an unusually low price. For that reason most sellers aren’t willing to accept purchase offers contingent on the sale of the buyers current home, unless the buyer is only asking for a month or two to sell it. While it is inconvenient, moving into a short term rental after you sell will also allow you to take full advantage of your considerable negotiating leverage when you buy the next home.

Another tool than can simplify some of the chores related to home buying are service aggregator web sites that let you compare rates from different local providers of electricity, local, long distance and cellular telephones, oil and gas, TV and Internet services, and newspapers by zip code. Among them are www.connectutilities.com, www.whitefence.com and www.allconnect.com.  Some aggregator web sites charge a fee for their services and all of services providers in each area may not be available on each Web site.

Sellers can take advantage of new technology in real estate services as well. See our suggestions in the separate article, "Selling in a Tough Market", below.

Resolution #7: I will look for economical ways to increase the value and livability of my home. If you are like most of us, you probably have a list of things that need to be fixed or upgraded in your home, and a remodeling project may be on the list as well.
You are also like most of us if many of the things on your "to do" list have been on the list for many weeks, if not months. You may have noticed that those jobs seldom get done by themselves, and some neglected repairs can get worse over time.

Start by putting your home “to do” list in priority order. Put on top the kinds of repairs that can cost more if neglected (a leaky roof for example), or which will continue to cost you money until they are fixed (a broken refrigerator seal, leaky faucet or toilet, etc.). Usually the parts are the least expensive part of a repair. If you are at all handy force yourself to take the time to do simple repairs yourself.

If you’re not handy or won’t have the time to fix everything in the next few months call a handyman for the things you can’t handle. A good handyman should be able to do most things you need at a far lower rate than a plumber would charge to fix your toilet or an electrician would charge to fix a broken appliance. Ask your neighbors for recommendations of good handymen, and find out their hourly rates. There are a growing number of handyman service franchises around the country, but an established local independent handyman will often be cheaper, if not also better.

More extensive remodeling projects will probably require a remodeling contractor. Many projects can return 100% of the investment when you eventually sell your home and they will improve your lifestyle in the meantime. Another plus of remodeling compared to the alternative of selling your home and buying another is that the transaction costs of selling your home and buying another can be quite high. By the time you finish doing both, you can easily spend 10% of your homes selling price on real estate sales commissions and the various settlement costs for both homes. Transaction costs come out of the selling price of your current home and add nothing to the value of its successor. You can do a lot of remodeling and add a lot of value for 10% of your homes selling price.

Best candidates for a good return on your remodeling investment are things like refreshing badly dated kitchens or baths, or adding a second bathroom in a one bath home. The National Association of the Remodeling industry periodically publishes return-on-investment data on most types of remodeling projects. Don’t over improve to where your home’s value substantially exceeds that of the neighbors or you’ll have trouble recouping your investment when you eventually sell. You can also help keep costs down if you are willing to do some of the easier finish work yourself, like painting or trim work.

Check the references of remodeling contractors thoroughly. Consumer complaints regarding remodeling contractors consistently at the top of the Better Business Bureau’s and the American Homeowners Foundation’s complaint list. To avoid disputes always use a comprehensive contract when you hire a remodeling contractor. The American Homeowners Foundation offers a comprehensive eight page model contract, which you can order at www.AmericanHomeowners.org.

Resolution #8: I will engage in the political process to influence issues of economic impact to me and my home.
Home ownership is a nonpartisan condition, yet the votes of legislators and rules of regulators will have a lot to do with the value of your home and your economic future. Home equity is the single largest form of savings for most homeowners and many of those votes will impact the value of your home. They will also impact your mortgage interest rates, your taxes, other major expenses for most homeowners, such as healthcare and many others that not only impact your ability to buy a home but also the lifestyle of most homeowners.

Until now the 75 million American homeowners have been the true “silent majority”. But  American homeowners can no longer afford to remain silent. We must raise our voices to policymakers at all levels in 2007 to protect the value of our homes and the institution of home ownership.

Help us Set the Policy Priorities of American Homeowners

Please tell us your views on state and national policies that will have a significant impact on homeowners in 2007.

Every year the American Homeowners Grassroots Alliance publishes its annual “Issue Guide for Federal and State Policymakers”. The Guide groups the Alliances policy goals in ten subject areas. We share the Guide with federal and state policymakers and the media so they can use it to gauge policies that have a significant direct or indirect economic impact the nation’s 75 million homeowners. The ten areas are Budget and the Economy, Consumer Protection, Education, Energy and the Environment, Healthcare, Housing and Real Estate, International Trade, Credit & Financial Services, Tax, and Technology and Communications.

In any particular year not all the issues may receive significant consideration in Congress, federal agencies, the state legislatures, and state regulatory bodies every year. Legislators and regulators don’t have enough time to focus on all the issues, and what they do address is determined by a number of factors, including pressure from the media and their constituents.

Among their constituents are the nation’s 75 million homeowners. If there is enough broad and vocal support for new legislation and/or regulation, then legislators and regulators will act. There are certainly enough American homeowners to drive policy issues in 2007 if each of us makes a new years resolution to become activists in determining our own destiny.

There were several notable successes in 2006, and we can have even more in 2007 if more homeowners engage in the process this year. Congress’s December holiday present to American homeowners was to make the cost of private mortgage insurance tax deductible for low and moderate income homeowners who get new mortgages in 2007. The same legislation also extended for several years tax credits for energy efficiency improvements to existing homes and for the construction of energy efficient new homes. Extending these deductions and credits to 2008 and beyond will certainly be one of the Grassroots Alliance’s 2007 priorities.

The “new homes tax”, a tariff on Canadian softwood that has been adding about $1,500 to the average cost of a typical new home in the U.S., appears headed for repeal. Many state and local governments have helped reduce the cost of homeowners' TV services (and indirectly their Internet and telephone services as well) by as much as $20 a month by allowing new competitors to cable TV monopolies.

Despite the support of the Federal Trade Commission (FTC) and the Department of Justice (DoJ) we were able to stop only a few of the efforts of state real estate associations to pass state laws aimed at denying consumers alternatives to the high cost of traditional real estate brokers. On a more positive note the FTC was successful in stopping the practice of multiple listing services (MLSs) to keep the listings of homeowners who used Internet brokers from being distributed on the Internet, and DoJ continues to pursue its antitrust lawsuit against the National Association of Realtors for similar efforts. Efforts to stop the use of eminent domain procedures to seize homes for commercial redevelopment also met with mixed success.

Last year’s federal guidelines tightening all lenders’ underwriting standards and requiring more complete disclosure of terms of loans for interest-only and payment-option loans to all types of sub prime loans and nontraditional mortgage products have already been adopted by 20 states. With the rapid recent growth in these very risky loans this is a very positive development. While Congress and many states have begun to look at abusive practices in mortgage lending, title insurance, and in other areas, much still remains to be done.

Many 2007 priorities are likely to receive early consideration by the new Democratic Congress. With family health insurance costs up 70% (to $4,500 per family) since 2000, and 6 million families losing their health insurance since then, there is broad public support for cost-effective improvements to the Medicare prescription drug program and ending expensive previous concessions to drug companies and HMOs. An expected effort to make college tuition tax deductible, permanently, cut student loan interest rates, and expand Pell Grants will be welcomed by cash-strapped parents who own homes as well.

Initiatives to reduce energy costs and protect the environment are also broadly supported by most homeowners, although the economic savings from alternative energy sources will take time to materialize. Legislation to reduce dependence on foreign oil and create a cleaner environment, with more research funding for energy-efficient technologies and domestic alternatives such as biofuels, are also potential winners with homeowners, who are increasingly pressed by increases in home energy costs, automotive fuel costs and the impact of growing energy costs on the products and services they buy.

What’s your opinion? Which are the most important issues affecting homeowners and home ownership that the Grassroots Alliance should work on in 2007? Please take a few minutes to email us your suggestions. More importantly please also share those suggestions with your state and federal legislators! You can look up their email addresses by zip code here.

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