In December 2011, Congress reached a last-minute deal to fund the payroll tax cut extension. The payroll tax extension will provide a 2% tax reduction for individuals earning up to $106,800, so the tax extension will be very helpful for many Americans who are struggling during these tough economic times. But like so many things in our tangled economy, there’s a flip side. In this case, the tax cut deal has a rippling effect that will impact the mortgage world.

Here’s what’s happening and what it means to home loan rates:

What is happening and why? To put it bluntly, the passage of the payroll tax cut extension is being funded via a guarantee fees or “g-fee’s” by at least 10 basis points on the rate. So rather than giving a par rate of 4.00%, for example, the par rate is now increased by at least 10 basis points, or approximatley 4.10%. But as you probably know…home loan rates are priced and offered in .125% increments, so this will most likely impact the consumer by .125% in rate. Whether you agree or not on the politics behind this cost being passed along to folks who are taking out mortgages, the Congreeional Budget Office recently estimated that the increase will ultimatley pay for about $35.7 Billion of the cost of the payroll tax extension.

What exactly is this “g-fee”? The guarantee fee or “g-fee” is an amount charged by mortgage-backed securities (MBS) providers, like Freddie Mac and Fannie Mae, to help protect against credit related losses in the overall mortgage portfolio, in other words, it acts a lot like insurance and helps lower the overall risk…which means home loans can be offered at terrific interest rates to borrowers that have good – but not perfect – credit.

What exactly is the impact of the rate increase? For example, for a $200,000 home loan, the increased g-fee (assuming a .125% increase in rate) would equate to $250 more per year in interest, or $7,500 more over 30 years. Someone buying or refinancing a home can certainly choose to buy down the cost with cash up front – but most folks will not do this.

Who will this impact? The change will impact all new borrowers of Fannie Mae and Freddie Mac loans. The bill will also impact Federal Housing Administration (FHA) loans by increasing the annual mortgage insurance premium that borrowers pay by one-tenth of a percent.

When will it start?Officially, the increase to guarantee fees will begin on April 1, 2012. However, the increase is already starting to be seen in rate sheets right now, since home loans being originated now will likely not be closed, pooled and securitized until April…and therefore will need the increased g-fee priced in earlier.

How long will it be in effect? The increase will be effective through October 1, 2021.

The bottom line is that the g-fees will be going up…and this will impact home-buyers looking to obtain a home loan through Fannie Mae and Freddie Mac and FHA.

From Ric Edelman’s Inside Personal Finance

If you’re saving money to pay for future college costs, the best place to put that money is in a Section 529. And yet, a survey by the College Savings Foundation found that 48% of parents – almost half of all parents in this country – don’t know what a 529 plan is or have never even heard of one.

Six percent of those surveyed said that while they’ve heard of 529 plans, they think the plans are “too complicated.” Another 7% said (incorrectly) that other savings vehicles have better tax savings.

Section 529 plans (named for the section of the tax code that created them) offer you something you can’t get anywhere else: The ability to enjoy unlimited profits completely free of all federal and state taxes.

It’s true: You can set aside as little as $25, or as much as hundreds of thousands of dollars. Once the money is in the account, it grows tax-defferred, meaning you don’t pay annual taxes on the profits. And when you withdraw the money for college, the withdrawals are 100% tax-free.

There is no other vehicle that allows you to invest virtually unlimited amounts of money into investments that earn market-based returns where the profits are completely tax-free.

And it gets better. You can use the money to pay for an education at any college or university in the country, public or private. In fact, the student can attend college at any accredited institution in the world.

(There’s no requirement that your child attend an in-state school.) And, you can use the money for any college expense – not just tuition and fees, but also room and board, computers and books. Virtually any cost except travel or purchase of housing is eligible.

Also, it’s no problem if your child ends up not needing the money (thanks to a scholarship, or if he or she doesn’t go to college). Simply transfer the money to another child in the family, including your child’s cousins. You can even use the money yourself, transfer it to your parents or leave the money untouched for use by your child’s future children – your as-yet-unborn grandchildren! (Yes, you can actually enjoy decades of tax-free growth down the generations!)

Any child can have an unlimited number of 529 accounts. That means you can establish an account, and so can both sets of grandparents. Or they can contribute to the account you establish, if they prefer. And in many states, you get a state tax deduction when contributing to a 529 plan, further sweetening the benefits. (The tax deduction goes to the person who established the account. Thus, if a grandparent contributes to an account set up by the parent, the parent gets the tax deduction, not the grandparent. If the grandparent wants the tax break, he or she should create his or her own 529 account.)

Now that you have this information at your fingertips, it’s time to make a plan.

There are two types of credit accounts, and each is handled differently during a divorce. The first type is a secured account, meaning it’s attached to an asset. The most common secured accounts are car loans and home mortgages. The second type is an unsecured account. These accounts are typically credit cards and charge cards, and they have no assets attached.

When it comes to a secured account, your best option is to sell the asset. This way the loan is paid off and your name is no longer attached. The next best option is to refinance the loan. In other words, one spouse buys out the other. This only works, however, if the purchasing spouse can qualify for a loan by themselves and can assume payments on their own. Your last option is to keep your name on the loan. This is the most risky option because if you’re not the one making the payment, your credit is truly vulnerable. If you decide to keep your name on the loan, make sure your name is also kept on the title. The worst case scenario is being stuck paying for something that you do not legally own.

In the case of a mortgage, enlisting the aid of a qualified mortgage professional is extremely important. This individual will review your existing home loan along with the equity you’ve built up and help you to determine the best course of action.

When it comes to unsecured accounts, you will need to act quickly. It’s important to know which spouse (if not both) is vested. If you are merely a signer on the account, have your name removed immediately. If you are the vested party and your spouse is a signer, have their name removed. Any joint accounts (both parties vested) that do not carry a balance should be closed immediately.

If there are jointly vested accounts which carry a balance, your best option is to have them frozen. This will ensure that no future charges can be made to the accounts. When an account is frozen, however, it is frozen for both parties. If you do not have any credit cards in your name, it is recommended you obtain one before freezing all of your jointly vested accounts. By having a card in your own name, you now have the option of transferring any joint balances into your account, guaranteeing they’ll get paid.

Ensuring payment on a debt which carries your name is paramount when it comes to preserving credit. Keep in mind that one 30-day late payment can drop your credit score as much as 75 points. It is also important to know that a divorce decree does not override any agreement you have with a creditor. So, regardless of which spouse is ordered to pay by the judge, not doing so will affect the credit score of both parties. The message here is to not only eliminate all joint accounts, but to do it quickly.

Divorce is difficult for everyone involved. By taking these steps, you can ensure that your credit remains intact.

When a marriage ends in divorce, the lives of those involved are changed forever. During this time of upheaval, one thing that shouldn’t have to change is the credit status you’ve worked so hard to achieve.

Unfortunately, for many, the experience is the exact opposite. Unfulfilled promises to pay bills, the maxing out of credit cards, and a total breakdown in communication frequently lead to the annihilation of at least one spouse’s credit. Depending upon how finances are structured, it can sometimes have a negative impact on both parties.

The good news is it doesn’t have to be this way. By taking a proactive approach and creating a specific plan to maintain one’s credit status, anyone can ensure that “starting over” doesn’t have to mean rebuilding credit.

The first step for anyone going through a divorce is to obtain copies of your credit report from the 3 major agencies: Equifax, Experian®, and TransUnion®. It’s impossible to formulate a plan without having a complete understanding of the situation. (Once a year, you may obtain a free credit report by visiting www.AnnualCreditReport.com.)

Once you’ve gathered the facts, you can begin to address what’s most important. Create a spreadsheet, and list all of the accounts that are currently open. For each entry, fill in columns with the following information: creditor name, contact number, the account number, type of account (e.g. credit card, car loan, etc.), account status (e.g. current, past due), account balance, minimum monthly payment amount, and who is vested in the account (joint/individual/authorized signer).

So get to work on that and I will post the rest in the coming days.

You’ve probably heard the saying, “When you fail to plan, you plan to fail.” That is especially true when it comes to buying a home today. Underwriters are following strict guidelines – and that means even things like bank deposits and transfers are under scrutiny.

Here’s some insight on how underwriters analyze bank statements…and what you need to know and do (or not do) during the loan process.

Today, many banks require an explanation and proof of source of funds for any large non-payroll deposits that are listed on a bank statement. What is deemed a large deposit is largely determined by the underwriter and can be as low as a few hundred dollars. The reason for the underwriter’s concern is that an applicant may be borrowing money from individuals, or accepting money from an interested party to the transaction, to help with the settlement costs.

It’s easy to see how this bank requirement can create a lot of frustration, especially for people who are used to moving money between their accounts, which many of us do today. The key thing to remember is that anyone applying for a mortgage should avoid transferring money between accounts or making large non-payroll deposits during the home buying or selling period. While that may feel like an inconvenince, the time and headache you’ll save yourself from having to account for all your deposits will be worth it.