Contact Us
Mental Health
Financial advice
Youth Matters
Techno Corner
Finance | Financial advice | Immigration | Special Needs | Accounting | Business

Francis Vayalumkal

You probably see the sign on every street corner that’s says “mortgage rates as low as 1.9 percent” or even get post cards in the mail telling you about them. What exactly are they? Do you know how they work? Let’s try to understand this a bit better and assess the risk associated with them.

The loan with offers such as the one above is usually an option ARM loan. An option ARM offers a tantalizing possibility: The minimum payment is so low that you owe more on the house at the end of the month than at the beginning. Payment option adjustable-rate mortgages are appropriate for some borrowers in certain circumstances, and they're dangerous for other people.

If you have an option ARM, here are some risk factors to watch out for.

1. You don't understand how an option ARM works, but you have one anyway.

I have had several conversations with people who tell me about an option ARM they have or their friend just got. Very often, I have people asking me for information about an option ARM.

Option ARM mortgages are hard to describe. As I have seen it being explained somewhere, mortgages lie on a spectrum from the fairly simple to the complex, similar to the math taught from first grade through college. Fixed-rate loans are like basic arithmetic. Adjustable-rate mortgages are like algebra. Option ARMs are like calculus.

An option ARM is an adjustable-rate mortgage that gives the borrower four choices (usually) of a payment each month. The borrower can pay the amount necessary to pay the loan off in 15 years or in 30 years. The borrower can pay only the interest charged in the previous month. Or the borrower can make a minimum payment that doesn't even cover the interest, so that the loan balance increases.

Most option ARMs have absurdly low introductory rates, sometimes below 2 percent, that last just a month. Then they rise and keep rising. The rate changes each month, but the minimum required monthly payment changes only once a year.

As the introductory interest rate doubles, then triples, then quadruples, the minimum payment rises a maximum of 7.5 percent a year. Some borrowers may find that, when they make the minimum payment, their loan balance increases more than $1,000 each month.

2. You exaggerated your income on your application.

A lot of option-ARM borrowers have stated-income loans, in which the lender doesn't verify the amount that the borrower claims to earn. For auditing and fraud-fighting purposes, borrowers sign a document that allows the lender to do a spot check with the Internal Revenue Service.

Doing a stated income loan doesn’t mean you have to lie about your income. It should be used as a tool for people who cannot provide documentation for the money they actually make, instead of as convenience for people who don’t make enough money to lie and get a bigger house than what they can afford.

3. You regularly have been making minimum payments.

If you have been making minimum payments most months, you're not paying down your debt and might, in fact, be increasing it. You feel this not only in your pocketbook, but in your gut.

For many people, it’s a matter of worry every month. Where is the rate going to be next month? It’s even worse when you have an equity line of credit on top of your regular mortgage.

4. You're approaching the principal cap.

When you make the minimum payment, and the loan balance increases, that phenomenon is called "negative amortization."

Lenders won't let negative amortization go on forever. They set principal caps -- limits on how far negative amortization can go. Most option ARMs have a principal cap of 110 percent, meaning that if your loan balance reaches 110 percent of the initial loan amount, you'll suddenly have to start paying down the loan balance.

Before you reach the principal cap, the minimum monthly payment can rise only a maximum of 7.5 percent a year. After you reach the principal cap, that limitation is thrown out the window. The minimum monthly payment can more than double in some cases.

The monthly billing statement should tell you the current balance. The promissory note will spell out the initial loan amount.

5. House prices in your neighborhood may be falling.

The danger with falling house prices is that your home's market value could fall below the amount you owe on it. That puts you in a position where you can't afford to refinance the mortgage or sell the house unless you have enough cash lying around to make up the difference. And if you have that much cash, why are you in over your head with your mortgage?

So what should you do if you have an option ARM?

Lots of people are fine candidates for option ARMs. The loans are well-suited for people whose incomes vary from month to month (for example: small-business owners and salespeople on commission) and people who get a big chunk of their income via bonuses. To stay out of trouble, there are a number of things you can do if you have an option ARM: Make at least the interest-only payment, refinance the loan or sell the house and pay off the mortgage. By making the interest-only payment, you're at least treading water instead of sinking under the waves. You're not paying down principal but you're not adding to it, either. As rates rise, the interest-only payment rises.

But if you can't handle interest-only payments, it's time for plan B, which is refinancing the loan. If your current lender did a lousy job of explaining an option ARM, you'll probably want to avoid refinancing with that lender.

You will want to talk to your current loan servicer to find out if there's a prepayment penalty and how much it would cost. Most option ARMs have prepayment penalties, which you are charged if you refinance the loan or sell the house within a specified period, usually one to three years.

Then there's plan C: selling the house and paying off the loan. The main reason to do this is that you've looked at your finances and you realize that you bought too much house. You just can't afford your house and achieve your other financial goals at the same time.

You're an especially suitable candidate to sell the house and pay off the option ARM if house values are falling in your neighborhood. Unless you know that you can sit tight for five or six years while prices fall, stagnate and then rise, it's probably a good idea to test the real estate market.

Francis Vayalumkal is a loan officer at Market Street Mortgage and can be reached at (813) 971-7555 or via e-mail at

Finance | Financial advice | Immigration | Special Needs | Accounting | Business

Nitesh Patel

Most of us “get” the basics of financial management. While it may not be our favorite pastime, we generally know the gist of balancing our checkbook, paying credit card bills and identifying retirement funds. But, for many, that’s the extent of financial comprehension.

In fact, most Americans fail to make the grade when their financial knowledge is tested beyond the ABC’s of financial literacy. According to a 2006 study commissioned by Northwestern Mutual, Americans have little grasp of important – and relevant – financial matters that can affect their financial futures. In response to the study’s questions, which test financial knowledge, the vast majority of the more than 1,000 study participants failed to get 60 percent correct – that’s an F in school terms. (Northwestern Mutual, Money Maladies Financial Matters Study, March 2006).

The study found that Americans score well when they’re presented with a list of answers to questions that ask them to identify terms such as asset allocation, diversified portfolio and IRA. However, when asked questions that delve a little deeper, Americans don’t make the grade with the following issues:

* Bonds vs. stocks. Most Americans erroneously say bonds provide better long-term protection against inflation and other adverse market conditions as opposed to stocks.

* Group insurance. Six in 10 wrongly believe they will be able to take their group life or disability policies with them should they leave their job.

* Nursing home costs. Most underestimate such expenses; while the average yearly cost is about $75,000, most estimate the cost to be less than $60,000. In addition, few protect themselves against these costs.

* College savings programs. Less than half know 529 plans are savings vehicles for funding education.

Yet these results raise another important concern that must be addressed: our children’s knowledge of financial matters. Most parents know the importance of teaching their children how to manage money. In fact, two-thirds of teenagers look to their parents, not teachers or peers, to learn how to make money and manage it. (“Kid Stuff”, US News & World Report, 12/12/05). Yet according to a 2004 study by Northwestern Mutual on kids and money, nearly half of the parents surveyed admitted that they did not believe they were good financial role models for their children. (Northwestern Mutual, Teaching Kids About Money Study, 2004). So how’s their financial future looking? Not good, according to Jump$start.

Kids and money

The Jump$tart Coalition for Personal Financial Literacy has conducted national research underscoring that the average high school graduate also lacks basic personal finance skills and, therefore, struggle with everyday earning, spending, saving and investing.

The coalition’s most recent biennial survey, released in April 2006, shows that nationally, 12th-grade students are in trouble. Though they also understood fundamentals like asset allocation, at large, they correctly answered only 52.4 percent of the questions (Jump$tart Coalition, 2006 Survey of Financial Literacy Among High School Students, April 2006) – or the equivalent of an F – a sure sign that students’ lack of financial literacy remains an issue that affects all Americans.

The fact is that in today’s complex world, it’s not enough to know only the basics, and this holds true for both parents and kids. There is so much to understand about retirement, college saving, protecting our families with the right kind of insurance, and more that it’s up to each of us to stop this cycle.

So, where does the answer lie? If we aren’t grasping financial knowledge beyond the basics, how will our children ever learn it?

Investing in education

The answer lies in education – both at home as well as at school. For Americans who want to take a proactive approach to building financial knowledge and change the cycle, utilize the wide array of financial resources available to get you on track. Look at financial statements on a monthly basis to better understand and track investments. Reading reliable financial publications, such as The Wall Street Journal, Barron's and Investor’s Daily, also can grow one’s financial knowledge base. And don’t forget to include your kids in the conversation so you can learn together.

The Web also offers a variety of resources: Northwestern Mutual offers a Learning Center at, which features articles on a range of topics, as well as a glossary of financial terms and calculators to help gauge financial well-being. Moreover, parents and teachers can access information on teaching young kids about earning, saving, spending, investing and owing at, and

Your children’s school also can play a role, though it’s best if they are learning the foundation at home from you. However, encouraging school officials to consider classes and curriculum on the importance of being money smart shouldn’t be overlooked. There are plenty of free resources available to teachers through organizations such as The National Council on Economic Education and The Northwestern Mutual Foundation.

It may be eye-opening to gauge your own financial knowledge by taking the Money Maladies Test at, a condensed, 14-question version of the 2006 study. See where you are strong and also identify some areas you may want to address.

While some may be born into money or great wealth, no one is born knowing how to save or to invest. Building a financially secure future depends on learning the basic principles of earning, investing and saving. As Benjamin Franklin once said: “An investment in knowledge always pays the best interest.”

Nitesh Patel is a financial representative with the Northwestern Mutual Financial Network based in Clearwater for The Northwestern Mutual Life Insurance Company, Milwaukee, Wisconsin). To reach Patel, call (727) 799-3007 or e-mail

Finance | Financial advice | Immigration | Special Needs | Accounting | Business

Dr. Ram P. Ramcharran

Over the last nine months, I have been actively working on trying to understand all the things I should be doing to prepare for my son’s future. This includes his education, financial planning and medical planning and, most important, who is going to take care of him after I am gone.

One of the first things I realized from my research is everything you do starts at home. Your goal should be to get your loved ones educated and situated where they can at least be able to care for themselves with minimal outside help and that is only should they have that capacity to do so. You must understand that trying to find the right school for your special needs child is a great beginning but it is not enough. It is just a start in the right direction. I had a conversation recently with a parent whose 11-year-old son is severely autistic and does not have the ability to speak. This in itself limits what level of functionality the child will have in society; so, it’s imperative that he is capable of doing some things for himself. In this child’s case, the school system gave up on him because it did not see him as person; the school district saw him as a number. It got to the point where this parent had to take legal action against the school system to help with providing special need programs.

The truth of the matter is that you can’t trust your public school to provide the education and care that your special child needs. First, these teachers aren’t fully trained and their training is limited despite the programs that they have studied. Also, because of the many different types of disabilities these teachers have to deal with, they are limited in their function because each child is so different and requires individual attention. Another factor to consider is that most schools are not providing the needed amount of speech and physical therapy required to make a difference in the lives of these children. The solution is you must take on a greater level of responsibility to do more for your children at home. If they are going to have any chance of being an active member of the community and society, you must find alternatives to help provide the needed help for progress.

This brings us back to what I wrote about in the last few articles. Why it is important to be part of a network and support groups? Some of these organizations organize workshops on how to work better with the special needs of your loved one. They also give you ideas and techniques to help the child function more appropriately. These family networks are life saving for many parents who never expected they would have so much to deal with.

Dr. Ram P. Ramcharran can be reached at

Finance | Financial advice | Immigration | Special Needs | Accounting | Business

Kamlesh Patel
CRUNCHING ‘EM NUMBERS: How To Keep Your Customers Satisfied


In some industries, service has become a quaint memory, and customers are reduced to selecting the provider that costs or annoys them the least. But the golden rule has not been repealed, and pleasing your customers can create a powerful competitive advantage. A few simple changes may well increase your bottom line.

For example: We all hate having our time wasted, and businesses are among the worst offenders. To distinguish your firm from the rest, establish the following customer service policies and procedures.

Communicate with your customers. Return their calls promptly, update them about matters in progress, and explain delays as soon as you can.

Don’t make your customers jump through hoops. Offer discounts at the point of sale, rather than giving out coupons or making buyers apply for mail-in rebates. If you employ an automated phone system, provide a simple method for reaching a live person.

Don’t worry about trying to save face. If you’re even partly wrong, apologize and proceed to a resolution. Train your employees to do the same, and reward them for positive outcomes.

Let customers know you’re there for them and that you regard them as more than mere cash cows. Listen to their concerns, and address them promptly. If someone is unhappy with a purchase (whether product or service), fix it, replace it, or refund the payment in full. At worst, the loss won’t be compounded by damage to your reputation. At best, the money will come back multiplied by repeat business and referrals.

Quality service is a powerful marketing tool that’s surprisingly easy to deploy. Simply imagine how you would want to be treated, and provide that treatment to your customers. As their satisfaction increases, your profits will follow.


investment clubs bring a social element to investing

Investment clubs are groups of people who get together to pool their money and invest it. The purpose of a club is to educate its members about various investments and to select specific investments for the club’s money. Each member contributes capital to the club on a regular basis. Members take turns researching and reporting on potential investments; then they vote on which investments to buy.

Anyone can start an investment club. It can be a group of family members, friends, or even your local Girl Scout troop. Starting an investment club is fairly straightforward, but there are several important considerations.

Find a compatible group of people who want to join the club. Pick your members carefully. According to the National Association of Investors Corporation (NAIC), 25% of new investment clubs are out of business within two years. This is often due to poor member selection or the expectation of becoming rich overnight. Before you accept any money from members, have a well-drawn legal document that spells out the rules for the organization. How does one join? What happens when a member wants to leave? How much is each member expected to contribute, and how often? What are the club’s investment goals and policies?

Elect officers, including a president, vice-president, secretary, and treasurer. Some clubs have an education and social director as well. Every club should have at least one strong leader and a competent treasurer.

Sometimes joining an existing club may be easier than starting a new one. Attend several meetings as a visitor to get a feel for the club’s dynamics and its investing philosophy.

Clubs are commonly organized as partnerships. Under this legal form, the club must file an annual income tax return, but it pays no income tax. Partners report their proportional share of income and deductions on their individual tax returns. For any tax help your investment club might need, give us a call. (060908)

are you overlooking these education tax credits?

Two education tax credits first became available in 1998. Unfortunately, due to the complexity of the education tax credit provisions, many of these credits are still going unused. The education credits are intended to help families struggling to cope with the increasing costs of college and higher education. However, tax breaks only benefit those who take advantage of them.

Here is a recap of the main provisions of these credits.

Hope credit: For the first two years of college, this provision allows a tax credit of up to $1,650 per student, per year. The credit is computed as 100% of the first $1,100 in qualified tuition and fees, and 50% of the next $1,100. The credit can be claimed for expenses for yourself, your spouse, and your dependents. The student must be enrolled in an accredited school at least half-time for one academic period during the year.

Lifetime learning credit: This credit of up to $2,000 per year, per family can be taken for all years of post-secondary education without limitation on the number of years. The credit is computed at 20% of qualified tuition and related expenses incurred for the year. Courses to acquire or improve job skills also qualify for the credit.

However, you need to be aware of the following two limits that apply to these education tax credits:

To get the full credit, your adjusted gross income (AGI) must be under $90,000 ($45,000 for singles). If your AGI is higher, you get a partial credit until your AGI reaches $110,000 ($55,000 for singles).

The Hope credit and lifetime learning credit may not be taken for the same student in the same year. Also, the credits cannot be claimed for the same expenses for which another tax benefit is received.

Please contact us if you need details or assistance with your planning to maximize available tax breaks for education expenses.


reorganizing your portfolio can provide tax savings

If your investment portfolio is due for a review and perhaps some realignment, you may be able to reorganize your portfolio and cut taxes too. Here are some suggestions to consider.

Consider selling some securities. The tax code allows you to offset up to $3,000 of net capital losses annually against other taxable income ($1,500 if married filing separately). Selling enough “winners” or “losers” to reach this figure may result in the maximum tax benefit for 2006. But if you decide to repurchase securities you sell, beware of the “wash sale” rule. If you buy the same security within 30 days before or after selling it at a loss, the loss is not deductible. This rule does not apply if you sell at a gain. Let’s look at a couple of examples.

Example A: Sally has realized $5,000 of taxable gains in 2006. She decides to dispose of losers and sells enough to generate $8,000 in losses. Her $3,000 net loss should be fully deductible in 2006.

Example B: Jack has realized losses of $10,000. He still owns a stock with large unrealized gains, and he expects it to appreciate further. He decides to sell enough shares to generate $7,000 in gains and immediately repurchases the shares. Combining the $10,000 of losses with the $7,000 of gains gives him a $3,000 net loss which is fully deductible. Jack’s cost is the commission he pays on the sale and repurchase.

Consider donating appreciated stock to your favorite charity. Generally, you’re allowed to claim a charitable deduction for the fair market value of the stock and avoid tax on the gain. The charity can then sell the stock tax-free.

Careful planning and choosing among the different techniques can help you reduce taxes when reorganizing your investment portfolio. Before you reorganize your portfolio, contact us if you would like specific tax-saving guidance.


what’s your biggest business problem?

If you run a business, try this exercise. First, write down what you think is the single biggest problem in your business. Then ask the key people in your company to do the same. Try to include input from all areas of operations — sales, manufacturing, personnel, purchasing, shipping, finance. The number of inputs will depend on the type and size of your business, but make sure you cover everything from internal operations to relationships with customers.

Then compare the answers. You might find that one common theme emerges, or you might find some issues that you weren’t aware of. There might be a problem with your suppliers, or it might be a problem in closing sales. It could be an internal problem in meeting orders, or a shortage of suitable employees. Perhaps it’s a financial problem, such as finding financing or collecting payments. Sometimes it’s a frequent source of customer complaints.

Why focus on problems? Why focus on your problems instead of looking at what’s working well? Because directly or indirectly, problems translate into dissatisfied customers, higher costs, lower sales, and reduced profits. It’s usually true that it costs more to fix something that’s wrong than to do it right in the first place.

Once you have your list of problems, call together the group that provided input. Discuss the results and how to solve the most important problem or problems. It doesn’t have to become a big bureaucratic exercise. By the end of the meeting you should have fleshed out the issues and decided on a course of action.

Sometimes just the internal communication at the meeting will help to resolve issues. Often the true nature of a problem will change or become clearer as it is discussed. Make sure you involve key managers from all parts of your business. The different perspectives will help you reach a better solution. Also, the joint problem solving will make your staff feel appreciated and part of a team. But the best result of all is that your business will have recognized and addressed some of its biggest problems.

For guidance with any of your business concerns, give us a call.


References, Citations, and Suggested Additional Readings

for Material in the September 2006 Tax & Business Column

We thought you would appreciate having references, citations, and additional reading sources on Tax & Business Column articles.

Article: “Investment clubs bring a social element to investing” – Google “investment clubs.”

Article: “Are you overlooking these education tax credits?” – Code Sec. 25A.

Article: “Reorganizing your portfolio can provide tax savings” – Code Secs. 1091 and 170.

If your chosen publication/s are also distributed online, your column may appear in both versions. However, any other Internet use is expressly prohibited. Any unauthorized use will be considered copyright infringement and will be aggressively prosecuted. For tax, business, and financial information intended for use on the Internet, please go to

Mostad & Christensen, Inc. • Marketing Solutions for Accountants • P.O. Box 1709 • Oak Harbor, WA 98277

Toll Free 1-800-654-1654 • (360) 679-4164 • FAX (360) 679-4167 • E-mail:

For M&C’s Marketing Tips and Featured Products visit:

Kamlesh H. Patel, CPA, can be reached at (813) 289-5512 or (813) 846-5687 or e-mail or

Contact Information
The Editor:
Send mail to with questions or comments about this web site. Copyright © 2004 Khaas Baat.

Anything that appears in Khaas Baat cannot be reproduced, whether wholly or in part, without permission. Opinions expressed by Khaas Baat contributors are their own and do not reflect the publisher's opinion.

Khaas Baat reserves the right to edit and/or reject any advertising. Khaas Baat is not responsible for errors in advertising or for the validity of any claims made by its advertisers. Khaas Baat is published by Khaas Baat Communications.