Listen and learn

With Thanksgiving time comes Seattle's rainy season. Additionally, it's been quite chilly in the mornings as I await the bus. This has put a definite kink in my reading routine: it's just too wet to read a book, and too cold to have my hands out of my pockets! Fortunately, the library has come to my rescue again: audiobooks!

Thanks to the library's vast quantity of digital audiobooks (and some on CD), I now have a music player full of books to listen to when weather doesn't permit the physical versions. Neither snow nor rain nor heat nor gloom of night (or whatever) shall stop my reading!

(As an added bonus, I can listen while rocking babies to sleep in the dark.)

Typing test

One of my favorite things about Android is just how customizable it is. In particular, I greatly enjoy that I can swap out keyboards. My current favorite is Swype, but I skeptically refused to accept that it was much faster until I could get some empirical (if not statistically sound) evidence. Well, wait no more: Here it is.

I gave myself two minutes to do some extemporaneous writing (destined for my journal) on Swype in both portrait and landscape modes, as well as the Android stock keyboard and a physical Bluetooth keyboard. I then took the resultant writing and counted the words; I counted errors as well, to give some indication of the effectiveness. Here is the result summary:

Swype portrait: 37wpm, 1 error
Swype landscape: 34wpm, 2 errors
Stock: 24wpm, 1 error
Physical keyboard: 66wpm, 3 errors

Some quick notes: Swype in landscape screams out to be used with two thumbs, but it just doesn't work well like that; I ended up just sliding one finger around as before.

Stock with two thumbs seems to work all right, but feels frenzied, especially for the low speeds that came out of it.

The physical keyboard reigns supreme: I made more mistakes without automatic correction to save my bacon, but with speeds 80% faster than the nearest contender, I won't be ditching a keyboard when I have access to it.

Also, the physical keyboard put my mind at ease and let me just think about composing text; with Swype, I had to have constant vigilance as to where the letters were. This might go away with time, as I've only been using Swype for a couple of months, but the lack of applicable muscle memory venues suggests otherwise.

True break-even point of a refinance

I mentioned in an earlier post that a decision to refinance often involves a calculation of the "break-even" point. A much-simplified version of this calculation is to take the cost of the loan and divide it by the amount each monthly payment is lowered. However, this fails to take into account the loan term: refinancing a 15-year loan into a 30-year one will drop your payments considerably, but at substantial cost in the long run. Even just refinancing from a partially-paid-off 30-year loan to a new full-term loan will drop the payment while extending the payoff.

A better indicator of true value here is the interest paid each month. This is entirely dependent on the interest rate and the outstanding balance on the loan.

Using this metric makes a 15-year loan look much better, which (let's face it) it is. The main draw is that the interest rates on 15-year loans are tons lower (over half a percentage point) than 30-year rates. On a large (200K) mortgage balance, this can mean a difference of eighty dollars or more in interest each month, no small change. The monthly payment is still higher (ours was 40% bigger when we switched), but it's because you're paying off your loan instead of paying basically only interest.

If you can afford a 15-year repayment schedule, it sure is worth a look in our current interest rate environment.

The thousand-dollar e-mail

We recently started the process of refinancing our house, due to the drop in interest rates since we took out our current loan. As part of that process, I obtained some quotes from different lenders. One lender came back offering a lot more in "lender credits" (money they'd pay toward the loan) than their nearest competitor. So we went with them.

Unfortunately, when they pulled our credit score, it came back a bit lower than anticipated. Nothing catastrophic, but it did make them drop the level of the lender credit by a thousand dollars. With this new knowledge (including my current credit score), I decided it would make sense to inquire at the other lender, too, and find out the lay of the land.

First, though, I decided to make lender #1 aware of this fact. I sent them a simple e-mail message saying that the more accurate quote was quite a bit lower, and I would therefore be asking for other quotes.

Within minutes, I had a phone call: it was my representative from lender #1, who informed me that he had spoken to his manager, and they would be willing to extend me the original quote (as if I'd had the higher credit score) if I stayed with them.

I accepted; it's not every day you can make a thousand dollars with an e-mail.

Stepping down the ladder

We're refinancing again. Even though it's only been a year since our last refinance. Why?

Mortgage rates are down. Even more than they were last time. And that spells opportunity.

Imagine a hypothetical couple, in a situation similar to ours was, but with arbitrary numbers:

$200,000 15-year mortgage at 3.25%
Credit score: 800

According to the lovely rate quote machine at mtgprofessor.com, such a couple could sign up for a 2.625% loan with zero lenders' points and fees. Of course, for that loan, they'd have to pay out of pocket for the miscellaneous costs involved in closing the loan. Thus, a refinance decision usually involves calculating a "break-even period", like this:

The closing costs for the loan will be four thousand dollars, but we're paying two hundred dollars less in each month's payment, so after 20 months (4000/200), we'll have paid less in monthly payments than we paid to refinance. As long as we keep the loan longer than that, it will be worth it.

The decision is essentially whether you'll have the loan longer than the break-even period.

However, just like you can pay "points" for a lower rate loan, the lender will pay you "negative points" to take a higher rate loan. As of a few days ago when I checked, a 2.875% loan will include almost four thousand dollars' worth of negative points. That is enough to cover all the costs of appraisal, closing, and lenders'  fees with room to spare. Any extra funds will be applied to the couple's escrow account, to pay for property taxes and insurance. Such a loan is called a "no-cost" loan---that is, even though there may be money required at closing, all the lender's fees and third-party fees are covered.

Even though 2.875% is higher than the "going rate", it's lower than the couple's current rate. Also, since the negative points pay for the loan and more, the typical "break-even" calculation isn't even applicable: our hypothetical couple is ahead of the game right from the start! If rates drop next month, and they want to refinance again, they can do it again, and again, without losing anything except possibly some credit score points after applying for all those loans.

This technique of serial, no-cost refinancing is sometimes referred to as "stepping down the ladder", and it has the benefit that you can refinance continually as long as it's advantageous. If rates go up, though, you just stick with the last loan you took: though it's not the lowest you could have got, it's pretty close, and you don't have to keep "bottom-calling" on the way. (I would have called the bottom on mortgage rates a couple years ago, but they still keep getting cheaper!)

"Stepping down the ladder" is a viable strategy for today's market of falling mortgage rates, and anyone can do it.

Further reference:

http://thefinancebuff.com/cost-mortgage-refinance-stepping-down.html

Helpful chart at http://thefinancebuff.com/mortage-refinance-fixed-rate-or-adjustable.html

Keyboard shortcuts... for real this time

Over the past few days, I've been compiling a list of my keyboard shortcuts. That is, the ones that I use on a daily basis. Since I sit at a computer a lot each day, it got fairly long. But if you take the time to sift through it, you should be able to glean something worthwhile.

General
Ctrl+X	Cut
Ctrl+C	Copy
Ctrl+V	Paste
Ctrl+A	Select all
Ctrl+Left/Right	Move cursor by word
Ctrl+Up/Down	Move cursor by paragraph
Ctrl+Backspace	Erase the word I just screwed up typing
Alt+F4	Close current window
Ctrl+F4	Close document within current window
Ctrl+S	Save
Ctrl+P	Print

Click through for the full list.

Keyboard shortcuts

I made a list of helpful shortcuts for a friend. These are basic, but if you know someone who could use 'em, feel free to share:

General:
Select All	Ctrl+A
Undo	Ctrl+Z
Copy	Ctrl+C
Paste	Ctrl+V
New Window or New Document	Ctrl+N
Windows:
Switch between programs	Alt+Tab
Open Start menu	Windows key ÿ
Internet Explorer:
New tab	Ctrl+T
Find on Page	Ctrl+F
Word:
Open a file	Ctrl+O
Save a file	Ctrl+S
Print	Ctrl+P
Bold	Ctrl+B
Italics	Ctrl+I
Underline	Ctrl+U
Move a word at a time	Ctrl+Left (or Right)
Move a paragraph at a time	Ctrl+Up (or Down)
Select text	Shift+Arrow keys

Notes:

"Ctrl+A" means hold down Ctrl key while pressing the A key.

Get the printable pdf at scribd.

Tax efficiency: a working definition

The other week, I watched (almost; I read the transcript) a little informational video at Vanguard, where I keep some investments. It was tax season, and so I was interested in what they had to say about tax planning, and I happened across this video. I was perusing through, when one of the characters said this:

...tax efficiency is not about minimizing taxes. It's about maximizing after-tax return.

And my mind expanded.

And he's totally right. See, when tax season is imminent, it's tempting to think about minimizing the amount of tax you're paying. After all, paying out that money hurts!

But the right way to think about it is, instead, to maximize the amount of money you're keeping.

Exhibit A: Mortgages. Mortgages are too often touted in the press as entitling one to the "lucrative" mortgage interest deduction. And it's true: for every dollar you pay in mortgage interest, you can reduce the amount of money you're taxed on by a dollar. Sweet, right?

Well, look at the big picture. For those in the 15% tax bracket, you save fifteen cents of income taxes for every dollar in mortgage interest you pay. While this certainly reduces the burden of mortgage payments somewhat, giving away a dollar to get fifteen cents is hardly a winning strategy. (*)

Conversely, if you pay off your mortgage, you do "lose" the mortgage interest deduction, but you also don't have to pay any mortgage interest. Certainly there's still an argument for keeping a mortgage alive when you can afford to pay it off, but it's not the slam dunk often portrayed in the media. Instead, think about it clearly and run the numbers.

Is tax efficiency around minimizing your taxes? It shouldn't be. Think instead about maximizing returns instead, and that will point you in the right direction.

----
* The real impact of the deduction is to lower the effective interest rate of the mortgage, from, say, 4.0% to 3.4%, assuming that (a) you itemize more than the standard deduction already, (b) you aren't in any credit phaseout ranges, and (c) ignoring air resistance.

My mortgage refinance

A few months ago, we decided to refinance our mortgage. So with the help of the Internet, we quickly identified the going rates at a few different firms. The lowest one by far was First Financial Services, Inc., based in Charlotte, NC. In fact, they undercut their nearest competitor's offer by $1,600, and that offer was already about $10,000 better than those from the big banks.

Nevertheless, I did some sleuthing around and contacted some other lenders. All their salesmen asked what other offers I had, and when I shared FFS's numbers, most of them warned me that "with rates like that, something's up", and that it was "too good to be true". And I admit that I did have my doubts. But after doing some research online, I couldn't find any bad reviews of FFS, so I went ahead and filled out the paperwork.

A month later, we had successfully refinanced our loan, and the total out-of-pocket closing cost was under $1,000. With the interest included in the loan payoff and other "hidden" items, the actual cost was under $500. Keep in mind, this for a loan modification that will save us tens of thousands of dollars in interest over the life of the loan.

I've been meaning for some time to post a positive review online, but hadn't got around to it. So here it is.

First Financial Services really did a bang-up job of addressing my concerns through the whole process. They were relatively responsive to my inquiries, and when there was schedule slippage past the end of the rate lock period (due to high volume at their end), they honorably held to the rate they'd promised. Their e-signing system was convenient and efficient, and they even sent a notary over to our house so we could sign the paperwork at home. Oh yeah, and they saved us a ton of money.

Thanks, guys!

Avoiding double taxation on ESPPs

Ah, tax season. Every year, it seems like I'm affected by some new little trick or trap. This year it's my company's ESPP—employee stock purchase plan. It's an incentive provided by the employer to induce employees to purchase stock of the company itself. An example ESPP plan might let its employees put up to 10% of each paycheck directly into company stock, bought at a 10% discount.

One interesting aspect of these plans is the complex taxation mechanisms surrounding it. In the specific case that you sell the purchased stock within a year after acquiring it, you might end up being double taxed on some of the money you earn! Here's how:

Bill is an employee of the infamous XYZ Corp. He sets aside 10% of his $4,500 monthly paycheck, or $450, to participate in the company's ESPP. On the day the shares are purchased (e.g., March 31), the stock is trading at a price of $10. After the 10% discount, employees are buying at $9. Bill's $450 goes to purchase 50 shares of XYZ corp. (My, what nice round numbers!)

Here, we must take a brief aside into the Land of Arcane Calculations. For tax purposes, we must compute just how much of a benefit the ESPP gave the employee, or the "bargain element". This is the difference between the fair market value (FMV) of the stocks at purchase (50 * $10 = $500) and the actual price paid for them ($450). For Bill, the bargain element is $50. (This will be important later, like next February.)

All right, so now Bill holds the XYZ shares for six months, during which time XYZ Corp. does great, and the share price skyrockets to $12. (Whoo!) Bills sells his 50 shares at a healthy gain, for $600. All's well, right? (Side note: The IRS argot calls any such sale after less than a year a "disqualifying disposition".)

Early next year, Bill starts receiving his tax reporting forms. First comes the W-2. As per the IRS guidelines, XYZ Corp. monitors the sale of the shares given in its ESPP plan, and it includes the bargain element of the sale (that $50 we computed earlier) as part of his gross income. (If XYZ is like my employer, it's not itemized, either, so Bill will have to be diligent to notice it.)

Next, Bill gets a 1099-B statement from his brokerage. The brokerage reports that since Bill bought 50 shares at $9, then sold them at $12 within a year, he has $150 of short-term gains.

Okay, notice the sneaky double taxation? The bargain element has been included as income on both the W-2 and the brokerage statement. (Also, note that if this is a semi-monthly occurrence, the double-reported income for the year will total $1,200—no small chunk of change.)

After introducing the problem, I won't endeavor to solve it here, as it's already been done excellently by Fairmark.com(*). But if you participate in an ESPP (and if you can, you should), be aware of this little taxation trap.

(*) Short version: alter the basis reported by the brokerage to reflect FMV, then tell the IRS that you did so.