Home values across the country have declined, and many homeowners owe more on their mortgages than their homes are worth. When you’re “underwater” on your mortgage, it may be possible to refinance, but it will depend on your circumstances and the type of mortgage you have.

Refinancing an underwater mortgage is usually difficult, because lenders generally require that you have equity in your property. However, if you meet certain criteria, you may be eligible to refinance your mortgage through the federal Home Affordable Refinance Program (HARP). This program targets homeowners who are underwater but who are having no trouble making their mortgage payments.

To qualify for HARP, your mortgage must be owned or guaranteed by Freddie Mac or Fannie Mae, and you must be current on your mortgage at the time of the refinance. In addition, you must have made no late payments within the past six months, and no more than one late payment in the past twelve months. Other eligibility criteria also apply.

To find out if you’re eligible for HARP, start by verifying that your mortgage is backed by Freddie Mac or Fannie Mae. You can do this by visiting www.freddiemac.com or www.fanniemae.com and using their lookup tools. Once you’ve established that your mortgage meets this basic criteria, contact your current lender or other lenders to see if they offer HARP refinances–not all lenders do. For more information about HARP, visit www.makinghomeaffordable.gov.

Another option you might have is a cash-in refinance. With this type of refinance, you bring cash to the closing to reduce your mortgage balance and increase your home equity, enabling you to meet the lender’s loan requirements. Underwater borrowers who can also afford to refinance to a shorter loan term (e.g., from 30 to 15 years) might especially benefit because they may boost their equity stake more quickly. However, home equity isn’t liquid and it’s possible that home values will continue to decline, sinking borrowers further underwater, so a cash-in refinance is only an option if you have substantial savings and can ride out the ups and downs of the housing market.

Historically low mortgage interest rates have prompted many homeowners to think seriously about refinancing, but there’s a lot you need to consider before filling out a loan application.

Start by determining why you want to refinance. Is it primarily to reduce your monthly payments? Do you want to shorten your loan term so that you can save interest and possibly pay off your mortgage earlier? Are you interested in refinancing from one type of mortgage to another (e.g., from an adjustable rate mortgage to a fixed-rate mortgage)? Establishing a goal will help you determine if refinancing makes sense for you and which type of loan will best suit your needs.

Keep in mind that the low mortgage rates that are advertised aren’t available to everyone. To get the best rate, you’ll need to meet the lender’s criteria. For example, you generally need to have an excellent credit score, stable income, and substantial equity in your home–e.g., 20% or more. The type and length of the loan will also affect the rate you receive–in general, the shorter the loan term, the lower the rate. Advertised mortgage rates sometimes also include points that you’ll have to pay to obtain the lower rate–each point is equal to 1% of the mortgage amount. Because so much can affect the rate you receive, it’s important to shop around and compare interest rates, loan terms, and costs to make sure you’re getting the best deal.

Finally, you’ll need to consider refinancing costs as well as the new interest rate you’ll receive. Refinancing costs may include points, closing costs, and private mortgage insurance premiums (if any) that you’ll have to pay when you take out the new loan. Will you be able to recoup these costs while you still own the home? To calculate this, divide your total refinancing costs by the monthly mortgage payment savings you’ll realize by refinancing. The result indicates how many months you’ll need to stay in the home to recoup your costs. If you don’t plan to remain in your home long enough to recoup your costs, then refinancing may not be worthwhile, no matter how low your new interest rate is.

You don’t want to pay more in taxes than you have to. That means taking advantage of every deduction and credit that you’re entitled to, and recognizing potential opportunities to save. It also means staying on top of deadlines, and avoiding mistakes that could prove costly down the road. So, here are some things to keep in mind this filing season.

Due date: April 17, 2012

The due date for 2011 federal income tax returns is April 17, 2012 (April 15 is a Sunday, and April 16 is Emancipation Day–a Washington, DC, holiday). Whether you’re preparing your own taxes or paying someone else to do them for you, you’ll want to start pulling things together sooner rather than later. That includes gathering a copy of last year’s tax return, W-2s, 1099s, and deduction records.

If you’re not going to be able to file your federal income tax return by the due date, file for an extension using IRS Form 4868, Application for Automatic Extension of Time To File U.S. Individual Income Tax Return. Filing this extension gives you an additional six months (to October 15, 2012) to file your return. Don’t make the mistake of assuming that the extension gives you additional time to pay any taxes due, though. If you do not pay any taxes you owe by April 17, 2012, you’ll owe interest on the tax due, and you may owe penalties as well. Special rules apply if you’re living outside the country or serving in the military outside the country on April 17, 2012.

There’s still time to contribute to an IRA

You generally have until the due date of your federal income tax return to make contributions to either a Roth IRA or a traditional IRA for the 2011 tax year. That means there’s still time to set aside up to $5,000 ($6,000 if you’re age 50 or older) in one of these retirement savings vehicles. It’s worth considering, in part because contributing to an IRA can have an immediate tax benefit. That benefit comes in the form of a potential tax deduction–with a traditional IRA, if you’re not covered by a 401(k) or other employer-sponsored retirement plan, you can generally deduct the full amount of your contribution. (If you’re covered by an employer-sponsored retirement plan, whether or not you can deduct some or all of your traditional IRA contribution depends on your filing status and income.)

A Roth IRA is a little different; if you qualify to make contributions to a Roth IRA (whether you can contribute depends on your filing status and income), the contributions you make aren’t deductible, so there’s no 2011 tax benefit.

Nevertheless, a Roth IRA may be worth considering, because qualified Roth distributions will be completely free from federal income tax.

Roth conversion regret?

Did you convert a traditional IRA to a Roth IRA in 2011, only to see the account drop in value as a result of ongoing market volatility? Wish you could go back in time so that you wouldn’t have to pay tax on the value of the IRA assets that was lost in the downturn? Turns out, you can.

For example, assume you converted a fully taxable traditional IRA worth $100,000 to a Roth IRA in 2011, but that Roth IRA is now worth only $60,000. If you don’t undo the conversion you’ll pay federal income tax on $100,000, even though the current value of those assets is only $60,000. If you undo the conversion, you’ll be treated for tax purposes as if the conversion never happened, and you’ll wind up with a traditional IRA worth $60,000–and no resulting tax bill. You generally have until the due date of your 2011 return, including extensions, to recharacterize your 2011 Roth conversion (note that special rules allow individuals who file timely 2011 returns to recharacterize up until October 15, 2012–talk to a tax professional for details).

If you do recharacterize your 2011 conversion, you’re allowed to convert those dollars (and any earnings) to a Roth IRA again (“reconvert”) but you’ll have to wait 30 days, starting with the day you transferred the Roth dollars back to a traditional IRA. If you reconvert in 2012, then all taxes due as a result of the reconversion will be included on your 2012 federal income tax return.

Expiring provisions

A number of key provisions have expired. So, without additional legislation, 2011 will be your last chance to take advantage of these opportunities. These now-expired provisions include increased “bonus” depreciation and IRC Section 179 expense limits that drop significantly in 2012. Additionally, 2011 will be the last year that individuals who itemize deductions will be able to elect to deduct state and local general sales tax in lieu of state and local income tax. And, both the above-the-line deduction for qualified higher education expenses and the above-the-line deduction for up to $250 of out-of-pocket classroom expenses paid by education professionals will not be available starting with the 2012 tax year.

Many retirement plan and IRA limits are indexed for inflation each year. Some of the key numbers for 2012 are discussed below.

Elective deferrals

If you’re lucky enough to be eligible to participate in a 401(k), 403(b), 457(b), or SAR-SEP plan, you can make elective deferrals of up to $17,000 in 2012, up from $16,500 in 2011. If you’re age 50 or older, you also can make a catch-up contribution of up to $5,500 to these plans in 2012 (unchanged from 2011). (Special catch-up limits apply to certain participants in 403(b) and 457(b) plans.)

If your 401(k) or 403(b) plan allows Roth contributions, your total elective contributions, pretax and Roth, can’t exceed $17,000 ($22,500 with catch-up contributions). You can split your contribution any way you wish. For example, you can make $10,000 of Roth contributions and $7,000 of pretax 401(k) contributions. It’s up to you.

If you participate in a SIMPLE IRA or SIMPLE 401(k) plan, you can contribute up to $11,500 in 2012 (unchanged from 2011). If you’re age 50 or older, the maximum catch-up contribution to a SIMPLE IRA or SIMPLE 401(k) plan in 2012 is $2,500 (unchanged from 2011).

Contribution limits: 2012 tax year*

*Contributions can’t exceed 100% of your income. Special catch-up rules apply to 403(b) and governmental 457(b) plans.

IRA limits remain the same for 2012

The amount you can contribute to a traditional or Roth IRA remains at $5,000 (or 100% of your earned income, if less) for 2012, and the maximum catch-up contribution for those age 50 or older remains at $1,000. You can contribute to an IRA in addition to an employer-sponsored retirement plan. But if you (or your spouse) participate in an employer-sponsored plan, your ability to deduct traditional IRA contributions may be limited, depending on your income. Roth contributions are also subject to income limits.

Some other key numbers for 2012

For 2012, the maximum amount of compensation your employer can take into account when calculating contributions and benefits in qualified plans (and certain other plans) is $250,000 (up from $245,000 in 2011).
The maximum annual benefit you can receive from a defined benefit pension plan is limited to $200,000 in 2012 (up from $195,000 in 2011).

And the maximum amount that can be allocated to your account in a defined contribution plan (for example, a 401(k) plan or profit-sharing plan) in 2012 is $50,000 (up from $49,000 in 2011), plus age-50 catch-up contributions. (This includes both your contributions and your employer’s contributions. Special rules apply if your employer sponsors more than one retirement plan.)

Income phaseout range for determining deductibility of traditional IRA contributions in 2012

Income phaseout range for determining ability to fund Roth IRA in 2012

When markets are volatile, sticking to a long-term investing strategy can be a challenge. Though past performance is no guarantee of future results, it might help you keep the ups and downs in perspective to see how recent market action compares to previous market cycles.

Bears versus bulls

Corrections of 10% or more and bear markets of at least 20% are a regular occurrence. Since 1929, there have been 18 previous 20%-plus bear markets (not including 2011 market action). Losses on the S&P 500 in those markets ranged from almost 21% in 1948-49 to 83% during 1930-1932; the average loss for all 18 bears was 37%.*

However, since 1929, the average bull market has tended to last almost twice as long as the average bear, and has produced average gains of about 79%.* Individual bull market gains have ranged from 21.4% at the end of 2001 to the nearly 302% increase registered during the 1990s.* The worst annual loss–47%–occurred in 1931, but the all-time best annual return–a capital appreciation gain of just under 47%–happened just two years later in 1933.**

Points of reference

Last year’s volatility rattled even seasoned investors. For example, during a single week in August, 2 of the Dow’s 11 best days in history alternated with 2 of its 11 worst daily point losses ever.***

While by no means normal, the highs and lows are hardly unprecedented. Even though the 634-point drop on August 8 felt historic, it didn’t begin to match the real record-holders. The single biggest daily decline occurred in September 2008, when the Dow fell 778 points. The biggest percentage drop was October 1987′s “Black Monday,” when the Dow fell almost 23%; that makes the Dow’s 5.5% loss on August 8, 2011, seem relatively tame by comparison. And August 8 was followed by the Dow’s 10th best day ever, with a gain of 430 points. While that upward movement may seem exceptional, the Dow’s best day ever came during the dark days of October 2008, when a 936-point move up on October 13 represented a gain of more than 11% in a single day.***

Stocks versus bonds

The last decade has been a challenging one for stocks. Between 2001 and 2010, the S&P 500 had an average annual total return of just 1.4%, while the equivalent figure for Treasury bonds was 6.6%.**** For much of that time, interest rates were falling, helping bonds to outperform stocks. However, interest rates are now at record lows, and rising rates could change the relative performance of stocks and bonds.

While there may be ongoing volatility in the markets that needs to be monitored, it’s important to keep things in perspective. Your ability to meet your goals could be affected if you change your overall long-term game plan with every new headline.

Past performance is no guarantee of future results. Market indices listed are unmanaged and are not available for direct investment. All investing involves risk, including the risk of loss of principal, and there can be no guarantee that any investment strategy will be successful. The Dow Jones Industrial Average (DJIA) is a price-weighted index composed of 30 widely traded blue-chip U.S. common stocks. The Standard & Poor’s 500 is a market-cap weighted index composed of the common stocks of 500 leading companies in leading industries of the U.S. economy.

**** 10-year rolling stock returns: based on Ibbotson SBBI data for annual total returns between 2001 and 2010 of S&P 500 and an index of U.S. Treasury bonds with an approximate 20-year maturity.

In the December Newsletter, you will find the following topics discussed:

1. Making Financial Resolutions? Look Back at Last Year
2. Debt Payoff Strategies
3. Q & A on Filing the Federal Financial Aid Application
4. Ask the Expert

- Is a stop limit the same as a stop order?

- Can a stop-loss order really protect me from losses?

To access this newsletter, click here. If any of these topics leave you with more questions than answers, please do not hesitate to contact me, my agents, or my staff members, so we can set a time to speak further. Graham Wickham- Pres and CEO of The Wickham Agency, Wickham Financial Group, and Wickham-Taurus Group- www.wickhamservices.com.

As the name implies, stop-loss orders are a way to help you manage the amount of loss you can suffer on a single holding. Also known as a stop order or stop-market order, a stop-loss order sets a level at which your broker is instructed to sell all or part of a particular position once the stop-loss point is reached.

With a stop-loss, you can specify a share price below which you do not want to hold a stock. Once the bid price hits that level, the position would be sold automatically at the market price. You also can employ what’s known as a trailing stop-loss to adjust the stop upward if a security’s price rises. The stop might be calculated as a percentage or a dollar amount relative to the bid price (for example, a loss of 10% or a $2 per share drop). If the stock’s price moves higher, your stop level also rises. That can help protect a portion of your paper profits while potentially allowing you to participate in any further upward appreciation. If the price falls, the holding simply moves closer to the level at which it will be sold.

In addition to helping you minimize losses you can’t handle, stop-loss orders are one way to remove emotion from your investment decision-making. They also can be especially useful if you’re anxious about volatile markets at a time when you know you’ll be traveling in remote areas and unable to monitor your accounts easily.

However, under certain circumstances, stop-loss orders can be a mixed blessing. Just because you’ve specified a certain stop-loss level doesn’t mean your trade will be executed at that exact price; once your specified level is triggered, the trade will be executed at a market price. If markets are extremely volatile or if a security is thinly traded, you might lose more than the amount you expected.

For example, during the 2010 “flash crash,” when prices plummeted and markets were temporarily illiquid, some stock positions were sold at prices well below the stop loss. Some of those trades were subsequently voided, but it’s still a good idea not to take the protection of stop-loss orders for granted, and to know that there can be a gap between expectations and execution.

A stop limit is typically used when you’re trading during a volatile market and want to target a specific price as closely as possible. When placing a market order, the price you pay is the best price available in the market at the time the order is executed. With a market order you can’t be sure of the price you’ll get, especially for more thinly traded securities or larger orders that may need to be handled in multiple transactions.

A stop order instructs your broker to buy a stock only when it is selling at or below a specified price (or if you’re selling, when it is at or above a certain price). Once the stop is triggered–in other words, once your specified price is reached–your order becomes a market order and is executed at the market price. However, if markets are volatile or the security is illiquid, the market price can change between the time the stop is triggered and when the order is fully executed. If you’re buying a stock and that price is lower, you benefit, but if the execution price is higher, you may pay more than you expected. For example, if you’re buying a thinly traded security and your order isn’t fully executed before the end of the trading day, you could run the risk of the market opening up strongly the next day–a phenomenon sometimes known as “gapping up”–potentially taking the price of your targeted stock with it. Conversely, if you’re selling a stock and the price moves lower before the trade is fully executed, you might make less from the sale than you intended.

A stop-limit order puts a limit on the price you’re willing to pay for your purchase (or accept if you’re selling). It mandates that a purchase be executed at a specific price or better; that price can be different from the stop level that triggers a trade, and increases the odds of the transaction meeting your expectations. If you’re selling, a stop-limit order also can be used to set a minimum price for the sale. Stop limits are typically good for a specific time frame, such as a day, a week, or a month.

Why wouldn’t everyone use a stop-limit order with every trade? Because they typically cost more to use than market orders. As a result, a stop limit probably makes the most sense for large orders in volatile markets, when a difference of even a penny or two per share can mount up.

In these uncertain economic times, you may be thinking of reducing your debt load. There are a number of strategies for paying off debt that you might consider. However, before starting any debt payoff strategy (or combination of strategies), be sure you understand the terms of your debts, including any penalties for prepayment.

Minimum payments

You are generally required to make minimum payments on your debts, based on factors set by the lender. Failure to make the minimum payments can result in penalties, increased interest rates, and default. If you make only the minimum payments, it may take a long time to pay off the debt, and you may have to pay large amounts of interest over the life of the loan. This is especially true of credit card debt.

Your credit card statement will indicate the amount of your current monthly minimum payment. To find the minimum payment factors, you will need to review terms in your credit card contract. These terms can change over time.

For credit cards, the minimum payment is usually equal to the greater of a minimum percentage multiplied by the card’s balance (plus interest on the balance, in some cases) or some minimal amount (such as $15). For example, assume you have a credit card with a current balance of $2,000, an interest rate of 18%, a minimum percentage of 2% plus interest, and a minimum amount of $15. The initial minimum payment required would be $70 [greater of ($2,000 x 2%) + ($2,000 x (18% / 12)) or $15]. If you made only the minimum payment each month, it would take you 114 months to pay off the debt, and you would pay total interest of $1,314.

For other types of loans, the minimum payment is generally the same as the regular monthly payment.

Make additional payments

Making payments in addition to your regular payments or the minimum payments can reduce the time payments must be made and the total interest paid. The additional payments could be made periodically, such as monthly, quarterly, or annually.

For example, if you made monthly payments of $100 on the credit card debt above (the initial minimum payment was $70), it would take you only 24 months to pay off the debt, and you would pay total interest of just $396.
As another example, let’s assume you have a current debt on which you owe $100,000, the interest rate is 7.125%, the monthly payment is $898, and you have a remaining term of 15 years and 3 months. If you make regular payments, you will pay total interest of $62,247. However, if you pay an additional $200 each month, it will take you only 11 years to pay off the debt, and you will pay total interest of just $44,364.

Another strategy is to pay one-half of your regular monthly mortgage payment every two weeks. By the end of the year, you will have made 26 payments of one-half the monthly amount, or essentially 13 monthly payments. In other words, you will have made an extra monthly payment for the year. Furthermore, payments are made earlier than required, thus reducing the total interest you will have to pay.

Pay off highest interest rate debts first

One way to potentially optimize payment of your debt is to first make the minimum payments required for each debt, and then allocate any remaining dollars to the debts with the highest interest rates.

For example, let’s assume you have two debts, you owe $10,000 on each, and each has a monthly payment of $200. The interest rate for one debt is 8%; the interest rate for the other is 18%. If you make regular payments, it will take you 94 months until both debts are paid off, and you will pay total interest of $10,827. However, if you make monthly payments of $600, with the extra $200 paying off the debt with an 18% interest rate first, it will take you only 41 months to pay off the debts, and you will pay total interest of just $4,457.

Get a debt consolidation loan

If you have multiple debts with high interest rates, it may be possible to pay off those debts by getting a debt consolidation loan. This type of loan will typically be a home equity loan. Therefore, the interest rate on it will often be much lower than the interest rates on the debts being consolidated. Furthermore, if you itemize deductions, interest paid on home equity debt of up to $100,000 is generally deductible for income tax purposes, thus reducing the effective interest rate on the debt consolidation loan even further. However, a home equity loan potentially puts your home at risk because it serves as collateral, and the lender could foreclose if you fail to repay. There also may be closing costs and other charges associated with the loan.

Note: All examples are hypothetical and for illustrative purposes only.

The federal government’s Free Application for Federal Student Aid, the FAFSA, should be filed as soon after January 1 as possible in the year your child will be attending college. The reason is that some federal aid programs operate on a first-come, first-served basis, so filing the application early ensures your child has the best chance of receiving the most favorable aid package.

Here are some common questions and answers regarding the application process.

What documents will I need to fill out the FAFSA?

The FAFSA relies on financial information from your previous year’s federal income tax return; for example, a FAFSA completed in 2012 will rely on information contained in your 2011 return. So the papers and statements you use to file your tax return are generally the same ones you would need to fill out the FAFSA, such as Social Security numbers, W-2 information, and information on savings, investments, and business assets. Your child will also need to have this information.

But here’s a dilemma: since most parents probably won’t complete their federal income tax return in January, how can they fill out the FAFSA, which relies on figures from their tax return? There are two possible solutions. The first is to prepare your tax return earlier. The second is to prepare (or hire a tax professional to prepare) an estimated tax return, which can then be used to complete the FAFSA–a practice the federal government deems acceptable. If you use an estimated tax return, keep in mind that you will need to provide a final tax return later on.

Tip: Even if you don’t expect your child to qualify for federal aid, you should still consider filing the FAFSA because colleges often require it as a prerequisite for students to be eligible for the college’s own institutional aid.

How do I file the FAFSA?

You can complete a paper FAFSA or file it electronically. The way you submit the FAFSA does not affect your child’s eligibility for aid.

You can get a paper FAFSA at your child’s high school or your local library. Once it’s complete, you should make a copy for your records and mail it in the preaddressed envelope that comes with the form.

You can file an electronic FAFSA at www.fafsa.ed.gov. You’ll need to apply for a PIN before you can actually start filling out the online application. Electronic FAFSAs offer several advantages over paper FAFSAs: detailed online help screens, an online chat option with a customer service representative, built-in error detectors, confirmation that the application was transmitted successfully, and faster processing–one week as opposed to two to four weeks for paper FAFSAs.

Tip: If you’ve previously filled out the FAFSA4caster, the federal government’s online financial aid forecasting tool, the online FAFSA will be automatically populated with your data.

What happens after I file the FAFSA?

After your FAFSA is processed, you will receive a Student Aid Report (SAR) either in the mail or electronically (depending on how you filed the FAFSA). This document summarizes data from your FAFSA and indicates your official expected family contribution (EFC), which is the amount of money the government expects your family to contribute to college costs for the current year to be eligible for financial aid. For example, “EFC25000″ means that your expected family contribution is $25,000.

You should review the SAR carefully to make sure it contains your correct income and asset information. Any corrections should be made immediately and sent back for reprocessing. If you have questions, you can contact the Federal Student Aid Information Center at 1-800-433-3243.

Tip: If there is an asterisk (*) next to your EFC figure, you have been selected for verification. FAFSAs are selected for verification randomly, or because the FAFSA is incomplete or contains estimated tax information. If you are selected for verification, you will need to provide additional documentation that might include a final tax return, household information, or appraisals for certain assets listed on the FAFSA. Not all families selected for verification will need to submit the same documents.

The SAR is also sent to each college you listed on your FAFSA. Once the college receives your child’s SAR, the financial aid administrator at each school that has accepted your child will craft an aid package that tries to meet your child’s financial need (remember, colleges aren’t obligated to meet all of it). To determine your child’s need, the administrator subtracts your EFC from the cost of attendance at that particular college. Your child will then be notified of the college’s aid package in an award letter sent out in the spring. The package typically includes various combinations of federal and college loans, grants, scholarships, and work-study jobs.