5 ways to avoid an audit

Whether you're facing an audit or simply want to avoid one, here are steps to take to deflect attention or get you prepared.

By Jeff Schnepper

Why me? You just got the invitation to a "party" that you hoped you'd never attend -- an IRS audit.

How did this happen and how can you prevent it from happening again? We'll get to the how when we answer how to minimize the chances of an audit and how to survive one.

Rule 1: Check your arithmetic

Few audits are generated by mathematical mistakes alone. The Internal Revenue Service computers automatically correct both mathematical errors and mistakes where you have claimed deductions that exceed limits set by the tax code itself, such as the 7.5% adjusted gross income limitation on medical deductions. However, too many of these kinds of errors indicate a sloppy return, and that could lead to a full audit.

While the advice may seem obvious, don't give the IRS any additional reasons to look at your return.

But how do you get picked?An IRS computer program compares your deductions to others in your income bracket and weighs the differences. This secret IRS formula, called the DIF Score, is used to select returns with the highest probability of generating additional audit revenue.

For example, a taxpayer with a $50,000 salary would rarely have $10,000 in charitable contributions. This doesn't mean that, if you have only $50,000 in income and actually have $10,000 in charitable contributions, you shouldn't claim those deductions. It only means that if that is the case, be prepared to prove those deductions. The DIF formula considers not only your income and deductions, but where you live, the size of your family and your profession as well. Rarely will a family of five living in the Hamptons have an income of $30,000 or less. It may happen, but if it does, the IRS will want to know how. This leads to . . .

Rule 2: Arrange your finances so they don't stand out

If you think you may be audited, see if your situation is likely to attract the tax man's attention. Here are groups that often do invite inquiries:
The self-employed If you are self-employed, you have more opportunity to either "hide" your income or "create" deductions by converting personal expenses into business expenses. If so, be prepared to substantiate your expenditures as deductible expenses. The IRS is aware of the myriad "business vehicles" that go away to college every September, and the probability of your being audited is enhanced.

Those who get their income in cash. The IRS has specific audit programs aimed at specific professions and occupations. Because they receive much of their income in cash, people who work in the gaming industry, waiters and even doctors are prime audit targets. The more cash you receive and the higher your income potential, the more likely the IRS is to find additional tax dollars by reviewing your return.

There are a number of areas of potential abuse that attract the IRS. In recent years, the IRS has been targeting these areas for audit:

Offshore credit card users

High-risk, high-income taxpayers

Investors in abusive schemes and promotions

High-income non-filers

Unreported income

Rule 3: Substantiate, substantiate, substantiate

In the audit itself, the IRS will focus on those items for which taxpayers have historically failed to keep the required substantiation. Traditionally, auto, travel, meals and entertainment have been the areas most audited. To deduct auto expenses, you must establish the percentage of business use as well as the actual expenses incurred. I ask my clients to keep a mini-cassette recorder in their cars to record the business mileage and purpose. Kept contemporaneously, it is acceptable as sufficient substantiation of business use. Alternatively, a written diary of miles used for business would also be accepted.

You must have a receipt for all expenditures of $75 or more for meals and entertainment. The rule is simple: no receipt, no deduction. If the expense is less than $75, a diary notation is sufficient. However, both the receipt and the diary notation must have all of the following information:

The amount paid

The name and location of the restaurant or entertainment facility

The person you entertained

That person's business relationship with you

The business discussion related to the entertainment

Unless you talk business, before, during or after the meal, your deduction won't be allowed. Remember, with the IRS, paper rules! With any and all expenses, deductions will be more easily allowed if you have a piece of paper to back them up.

Here's another piece of advice: Don't come in with a carton of miscellaneous receipts. The more "organized" your receipts and the more paper you produce, the easier it is for an IRS agent to conclude that you are organized, have full substantiation and owe no additional taxes.One more point about how you're selected for an audit. The IRS computer pulls out many returns for audit on a random basis. Your income, deductions or where you live are irrelevant. Your number just came up -- you won the audit lottery. A student making $3,000 a year is just as likely to be selected as an accountant making $300,000. You just got "lucky."

The IRS can audit you for three years after you file your return. In reality, however, most returns are audited within 18 months of filing. This gives the IRS time to do the review and request the appropriate substantiation before the statute of limitations (usually the three-year period) ends. Once the statute has run out, the IRS normally cannot audit your return, and your expenses are insulated from examination. It has been claimed that the later you file, the less likely it is the IRS will pick your return to be examined. The IRS still insists that agents are not graded or evaluated on the amount of money they collect until -- surprise! -- congressional testimony reveals that policy is not the same as practice.

Rule 4: Know when to file

I recommend that you have your return prepared early. If you have a big refund and are unconcerned with audit issues, file early and get your money back. If you have taxes due, and no penalty for underpayment, don't file until April 15. Don't ever pay a federal tax bill before it is due. It's an interest-free loan to the IRS.

On the other hand, if you are concerned about a potential audit, never file until the last minute. It won't hurt and can only decrease your chances of being selected.

Rule 5: Plan your taxes to pre-empt an audit

I highly recommend the use of pre-audit strategies. If, say, you have a huge medical deduction for a year that you feel would increase your chances of being audited, attach copies of your medical bills to your return.

Alternatively, if you made an unusually large charitable contribution, attach a copy of the check or receipts to your return. The IRS computer will still kick out your return, but when a real person looks at it, the reviewer will recognize that you know the rules. It may actually reduce your odds of a full audit.

Provided courtesy of http://articles.moneycentral.msn.com/

Five ways to cut heating costs

Inman News

If you're thinking it's time to do something about your cold house and your high heating bills, here are five win-win suggestions that will help you do both.

1. REPLACE YOUR FURNACE FILTER
A clogged filter makes your furnace work harder to deliver the same amount of heat, which wastes energy by keeping the furnace on for a longer period in order to bring the house up to the requested temperature.

If you have a central heating system (used for heat only), replace the filter once a year, at the start of the heating season. If you have a heat pump or a furnace with central air conditioning, replace it twice a year, at the start of the heating season and at the start of the cooling season. While replacing the filter, always use a shop vacuum to clean up as much dust and debris within the filter cavity as you can reach.

2. INSTALL A PROGRAMMABLE THERMOSTAT
Programmable thermostats work a whole lot better than your memory. They give you the ability to have a lot more control over your heating and cooling systems, and they will add both convenience and energy savings by raising and lowering the heat at preset times so you don't have to remember to do it.

A programmable thermostat will bring the system on and shut it off based not only on temperature, but on time as well. For example, the thermostat can be programmed to turn on the heat to a certain level at 6 a.m. when you get up, and turn it down again at 8 a.m. when you leave for work. It can also be set for different cycles on different days of the week, and can be overridden with the touch of a single button to temporarily raise or lower the heat.

3. INSULATE DUCTWORK
Since the ducts are running through an unheated space, whether in your attic, crawlspace, basement or garage, duct insulation is a huge part of the system's ability to retain heated air within the ducts until it gets delivered into the house. All of the ducts in unheated spaces should be completely wrapped without any gaps, and the insulation should be of sufficient thickness to provide good insulating value -- typically around R-8, which is approximately 2 1/2 inches of fiberglass.

4. CLEAN WALL AND BASEBOARD HEATERS
As with a central furnace, it's very important that wall heaters and baseboard heaters be cleaned at the start of every heating season. Before cleaning, however, first try to minimize the potential for dust buildup in the heaters. This might be done by rearranging furniture, increasing fresh air in the room, or increasing air flow in front of the heaters.

To clean baseboard heaters, first shut off the circuit breaker that supplies power to the heater. To be certain you have the correct breaker, turn the thermostat up to high for 30 seconds or so and make sure that the heater does not come on. Remove the front cover and use a vacuum to clean out the inside of the heater, being careful not to damage the aluminum fins inside the heater. If you notice that the fins are bent, you can use a fin comb, available through many heating contractors and other retailers of heating equipment, to straighten them out again.

For wall heaters, shut off the circuit breaker for the heater, and verify that it's off as described above. Remove the screws that hold the grill in place, and remove the grill. Wash the grill in hot soapy water, dry it, and set it aside. You can then clean the inside of the heater using a vacuum, taking care not to touch the heating elements, or you can blow out dust using the blower side of your shop vacuum.

Note: Be sure to refer to the instruction book that came with the heater, or check with the manufacturer's Web site for specific cleaning instructions and safety precautions.

5. COVER AND WEATHERSTRIP ROOM AIR CONDITIONERS
If you have a room air conditioner that sits in a window or mounts into an opening in the exterior wall, they have the potential to leak a lot of air. If the air conditioner is in a window and is easy to remove, your best bet is to remove it, clean it and then store it for next summer.

If it's not easily removed, then examine the unit carefully to see if there is any daylight coming in around it. You can use foam tape, expandable spray foam or other weatherstripping materials to close up the gaps around the case. Finally, buy or build a cover that will slip over the unit from the outside and prevent cold air from coming through it and into the house.

Provided courtesy of Inman News and Yahoo.com

What Makes a Good Mortgage Broker?

by Jack M. Guttentag

Last week I brought you some tips on how to know a good mortgage broker when you see one. Here are some more points to consider when you are in the market for a broker.

Good Brokers Will Not Quote Low-Ball Prices
Accurate pricing depends on a number of borrower, property, and transaction characteristics. If these are not known or used, the price cannot be accurate. Loan originators who quote the best prices possible -- and sometimes even better than the best possible -- with the intent of roping in the customer are low-balling.

Avoid any broker who quotes a price without first quizzing you about loan size, down payment, loan purpose, type of property, use of property, state, credit score, and documentation of income and assets.

Don't tempt a broker to low-ball by requesting a price on the telephone.

Good Brokers Try to Find the Best Price Available
You can't take this for granted because it can be tedious work. Brokers get their prices from wholesalers in the form of very complicated price sheets, all of which are formatted differently, making comparisons difficult. Further, while pricing the loan, the broker must also be mindful of getting the loan approved.

There isn't any very good way to monitor this, but you can ask the broker to show you rate sheets from the lenders he checked. This is not so that you can compare prices -- that would require a lot of instruction -- but simply to verify that the information is there.

Good Brokers Are Masters of Detail
Mortgages have many details that must be attended to before a loan can close. Overlooking even one can delay the closing, which could be costly to the borrower.

Good brokers avoid this danger using the same tool that is standard for airplane pilots about to take off, and increasingly in hospital intensive care units: a checklist. This is a low-tech device that has been shown to save lives, and it can also save a mortgage.

Ask the broker to show you her checklist, but don't expect to be able to keep it.

Good Brokers Keep Their Clients Informed
Failure to keep a borrower informed is one of the most frequent criticisms of brokers that I hear from borrowers, especially on purchase transactions where borrowers are faced with a firm closing date. Brokers often fail to let borrowers know that, while there is no news to report, matters are proceeding on schedule.

Negotiate an agreement with the broker on both the type and frequency of communications.

Good Brokers Attend Closings When Needed
Having a broker attend a closing may not always be feasible because the closing is too far away, and sometimes it isn't necessary because the borrower has been through the drill before. But if the borrower is a novice, having the broker available to help explain things is a major source of comfort.

If relevant to you, ask the broker if she will attend the closing.

Good Brokers Get Documents From Lender Prior to Closing
Obtaining all documents from the lender provides the borrower with an opportunity to read them at their leisure and clarify any issues. This may be more useful to the borrower than having the broker at the closing.

Ask the broker if you will have access to the final documents at least two days prior to closing.

Good Brokers Are Experienced
Mortgage transactions are complicated; there is much to learn, and brokers learn most of it by doing it. While more states are moving toward required examinations as a condition for licensing, the rules are spotty and not to be relied on. It is still possible for a borrower to be confronted with a broker who, a week earlier, was flipping burgers.

Ask the broker to summarize his work experience over the past 10 years.

Good Brokers Communicate Effectively With Borrowers
Poor brokers frequently slip into trade jargon, because they are accustomed to it, and insensitive to the client's lack of comprehension. I never fail to be amazed at mail I receive from borrowers asking me to explain something they were told by their broker. A broker who can't communicate well combined with a borrower afraid of looking stupid is a recipe for trouble.

Don't let a broker assume you understand something when you don't. Mortgages are complicated, but they are not beyond the comprehension of the average borrower, provided they are explained properly. If you don't understand what you are being told, it is because of the poor communication skills of the broker. Try another one.

Good Brokers Are Straight With Their Clients
Here are some broker statements that indicate your broker is not being straight. If you hear any of these, head for the door:

"I have a 1.5 percent mortgage for five years."

"Don't worry about the rate increasing in two years -- I will be there to refinance you into a lower rate before that happens."

"Don't worry about my fee. It's being paid by the lender."

Provided Courtesy of Yahoo Finance.

Obama's top priority: the economy

Aides say the President-elect's first full day in office will include several executive orders, push for stimulus.

By Ed Henry, CNN Senior White House Correspondent
Last Updated: January 19, 2009: 9:14 AM ET

WASHINGTON (CNN) -- Senior aides to President-elect Barack Obama say he will convene a meeting of his top economic advisers on Wednesday, his first full day in office, as the incoming president immediately tries to put the financial crisis at the center of his agenda.

Three aides said the incoming president is planning an ambitious first week that will include several other high-profile moves: a Wednesday meeting with military brass to map out a change to the mission in Iraq, appointing at least one envoy to quickly deal with the Mideast crisis, and issuing several executive orders that could spark controversies on issues ranging from the environment to detaining terror suspects.

But the Obama aides said the bulk of the executive orders are not likely to be issued on Tuesday because the incoming administration, in the words of one top aide, "does not want to cloud the first day" by overshadowing the historic swearing-in of Obama as the first African-American president.

That's why aides are pointing to Wednesday as a key marker. Obama is planning to bring together his top economic advisers to map out how to step up his own personal lobbying efforts to get Congress to pass his stimulus plan, which now has a price tag of $825 billion in the House.

"We have got to get an economic recovery and reinvestment plan in place quickly to turn the economy around," said one senior aide, citing the financial crisis as the top priority.

And on Wednesday Obama will also meet with top military commanders to discuss the war in Iraq and move to begin implementing his campaign promise of removing all combat troops within 16 months, according to aides. That is part of an effort to reassure Obama's liberal supporters that despite his heavy focus on the financial crisis, he will stay focused on changing the mission in Iraq, the stance that first propelled his presidential campaign at the grassroots level.

The Obama aides also revealed the Mideast crisis has shot to the top of the incoming president's immediate agenda. The aides said Obama himself has been pushing behind the scenes for quick, decisive action on the matter, overriding the advice of some aides who believe getting active instantly may unrealistically raise expectations for Mideast peace.

The aides told CNN one option under serious consideration is naming at least one high-profile envoy this week to help dig into the long-term problems in the region beyond just the crisis in Gaza, a move that Obama hinted at last week in an interview with USA Today.

On Sunday's "State of the Union with John King" on CNN, incoming senior White House adviser David Axelrod said the president-elect "has said repeatedly that he intends to engage early and aggressively with diplomacy all over the world and using the men and women, the professionals who are in place, who are great, and - where appropriate - special envoys."

Pressed on whether this meant moving to deal with the Mideast crisis as soon as Tuesday, Axelrod said, "I think that the events around the world demand that he act quickly, and I think you'll see him act quickly."

Executive orders

Aides say the incoming president is also mulling several high-profile executive orders that can change U.S. policy with the simple stroke of a pen, particularly major changes to the approach in the war on terror. In addition to an executive order closing the U.S. military prison at Guantanamo Bay, aides say the incoming president is considering another executive order that would specifically ban the use of torture on terror suspects.

CNN has learned that another option under consideration is an executive order raising fuel efficiency on automobiles, a move that would please environmentalists but put more pressure on the struggling U.S. auto industry.

For now, however, aides are being tight-lipped about specifically which executive orders will be issued.

Incoming White House Chief of Staff Rahm Emanuel told reporters on Saturday that "there are a number of things we're looking at" based on campaign promises the president-elect made on domestic and foreign policy.

Focus on economy


Meanwhile, aides say Obama is strongly considering an economic speech to a joint session of Congress just weeks after taking office in order to communicate directly with the American people that the financial crisis is likely to continue for a long time - even if his economic recovery plan is passed into law during the first 100 days.

Aides are expecting the speech to be delivered the week of February 23, after Congress returns from the Presidents' Day recess. Democratic leaders are aiming to get the economic recovery plan to Obama's desk for his signature before that recess.

Obama has been trying to downplay expectations for quick results from his stimulus plan in recent public speeches, which could give him some political breathing space to try and let the plan work.

"We're going to have a tough year, 2009," Obama told CNN in an interview Friday.

"I don't think that any economist disputes that we're in the worst economic crisis since the Great Depression. The good news is that we're getting a consensus around what needs to be done. We've got to have a bold, aggressive reinvestment in a recovery package. It's working its way through Congress. That's going to help create three to four million new jobs," he said.

Aides say the speech to a joint session of Congress is part of a broader strategy by the incoming president to "engage with the public" about the financial crisis to try and build trust with the American people.

Provided courtesy of CNNmoney.com

Tax Tips for the Unemployed

As April 15 approaches, those who were out of work in 2008 might have a lot of questions about their tax returns. Here are some answers.

By Jessica Dickler, CNNMoney.com staff writer
Last Updated: January 9, 2009: 3:39 PM ET

NEW YORK (CNNMoney.com) -- Tax season can be a frustrating and confusing time for those with a spotty employment record and little spare cash. But people who were out of work in 2008 will still have to report to Uncle Sam.

Friday's labor report showed that nearly 2.6 million jobs were lost over the course of 2008, the highest yearly job-loss total since 1945. The unemployment rate now stands at 7.2%, a 16-year high, according to the Labor Department.

"More people than ever before may be experiencing, for the first time, unemployment and the tax implications related to that," saidMark Steber, vice president of tax resources at Jackson Hewitt.

For those taxpayers who were unemployed in 2008 and unsure about how to account for a brutal year, here are some answers:

Do I still have to pay tax if I was out of work in 2008?

Probably. The IRS requires anyone who received a W2 from their employer and made at least $8,950 (if you're single and under 65 years old), or made at least $400 if you're self employed, to file a tax return. If you're anticipating a tax refund, you must file - even if you didn't work at all.

But whether you will have a tax liability depends on a variety of factors, Steber said. "Every tax situation is unique, based on the facts and circumstances of the taxpayer."

For example, if you only had unemployment compensation throughout the year, you may owe some tax on the checks you received. A severance package could also give you a tax bill, as could dividends and interest from investment income.

Other factors that weigh in include your tax deductions and other life changes associated with unemployment, like if you downsized your house or picked up supplemental income, Steber said.

Do I have to pay tax on my unemployment checks?

Yes. Unemployment compensation is taxable on federal and most state tax returns.

When applying for unemployment, you can choose whether you want federal and/or state income taxes automatically taken out of your unemployment benefits. If you choose to withhold, federal income taxes are withheld at a 10% rate, while the state rate varies. But since many cash-strapped Americans opt not to withhold - come April they may have to pay up.

So unless you previously elected to have taxes withheld throughout the year from your unemployment checks, a tax bill may be an unwelcome surprise when you file your 2008 return.

What if I took money from my 401(k)?

You may owe taxes if you took money out of a retirement plan or 401(k) to supplement your unemployment checks. That counts as income and is taxable too, said Joseph Perry, the partner in charge of Marcum & Kliegman's tax department. And that might not be all you owe. The taxes are in addition to a 10% penalty on early withdrawals if you're below the age of 59-1/2, he cautioned.

What if I did some supplemental work?

Freelance and project work can be a lifeline for unemployed workers between jobs. "Unemployed tend to become self-employed, that's a natural outgrowth of being unemployed," Steber said.

But if you picked up odd jobs or offered consulting services while unemployed, you're subject to income tax and self-employment tax on that income.

To report that supplemental work, taxpayers must include a Schedule C with their income tax return, which details the income and expenses for the year.

If you continued a project for your old employer or freelanced for someone else, and made more than $600, you will be issued a 1099 and must include that in your income tax return as well. (If you made less than $600, then you will not be issued a 1099 but are still responsible for reporting anything you made as taxable income.)

What if I had to relocate for a job?

If you accepted a new job that required relocating, you may also be able to deduct the moving expenses not reimbursed by your new employer. But there's a catch, the new job site has to be 50 miles further than the old residence was from the old job, according to Tom Ochsenschlager, vice president of taxation for the American Institute of Certified Public Accountants, which basically prevents you from trying to deduct a move within the same metropolitan area.

What if I spent a lot of money on job searches?

Those who were on the job hunt last year may get a gift from Uncle Sam: a slew of tax deductions. In fact, many of the expenses incurred while looking for a job can be deducted, which can result in some serious savings.

By declaring the following itemized deductions, taxpayers may lower the amount of taxable income they have for the year.

For starters, anything you spend on creating, printing and mailing your resume is deductible, as is anything you spend on a career coach or headhunter. Also included are long distance or cell phone charges directly associated with your job search.

Transportation costs such as a bus, taxi, train or plane to an interview is deductible, as is the mileage costs accrued when you drive to interviews and even to the unemployment office. (Between Jan. 1, 2008, and June 30, 2008, taxpayers can claim 50.5 cents per mile, between July 1, 2008 and Dec. 31, 2008, taxpayers can claim 58.5 cents per mile.) That also goes for parking and tolls and meals and lodging if the interview was out of town.

But the buck stops there. You cannot, unfortunately, deduct the value of your time or the cost of a new interview suit, briefcase or new shoes for pounding the pavement.

Of course, taxpayers should keep receipts related to any of these expenses in order to substantiate them when filing and experts recommend consulting a professional tax preparer for help.

First Published: January 9, 2009: 2:43 PM ET

The Best Time of Day to Do Your Cardio Workout

Take advantage of your body's prime hour to burn calories more efficiently

Ngoc Minh Ngo

5 p.m. to 6 p.m."For increasing fitness, decreasing the chance of injury, and improving sleep, the best time to exercise is late afternoon or early evening," says Matthew Edlund, M.D., author of The Body Clock Advantage (Circadian Press, $15, http://www.amazon.com/) and head of the Center for Circadian Medicine, in Sarasota, Florida. At these times, he says, your lungs use oxygen more efficiently, you're more coordinated, and your muscles are warmed up, so you're less likely to suffer a sprain or strain. Finish exercising at least three hours before bed so that when your head hits the pillow the extra adrenaline will no longer be pumping through your bloodstream (and other factors that keep you awake will also have subsided). Bonus: "If you're all wound up at the end of the day, exercise may be a great stress reliever," notes Shirley Archer of the Stanford Health Improvement Program, in Palo Alto, California.

Written by Leslie Yazel October 2004

The Best Time of Day to Do Just About Anything
The Ready-for-Anything Gym Bag
Wrist Pouch for Workouts

7 things to know about mortgage rate in 2009

It wasn't too long ago that mortgage rates were expected to move sharply higher in the coming months thanks to rattled investors and mounting inflation. But while falling home prices and jittery financial markets have done little to assuage investor fears, a number of recent developments have combined to create a decidedly optimistic mortgage-rate outlook for 2009. "The preponderance of forces that would typically operate on mortgage rates — the economic backdrop, the inflation backdrop and, in this case, government policy — are all pointing towards lower interest rates," says Mike Larson, a real-estate analyst at Weiss Research.


Rates have already become increasingly attractive. The average national rate for 30-year fixed mortgages fell to 5.57% in the week of Dec. 5, from 6.61% just seven weeks earlier, according to HSH Associates. Here's a look at where mortgage rates are headed in the new year, the forces that will be influencing them, and how consumers can take advantage of the trends.

1. 2009 rate outlook: Thirty-year fixed mortgage rates should begin 2009 at around 5.5%, says Keith Gumbinger of HSH Associates. From there, they will "wax and wane" in the 5.5% to 6% range, before closing out the year somewhere between 6% and 6.25%. "That's still very attractive," he says. "There is no reason to think that rates are going to go up so substantially so as to erode the marketplace." (However, should the economic outlook improve more quickly than expected, mortgage rates could trend higher, Gumbinger says. In addition, new government programs unveiled next year could alter the projection.)


2. Inflationary easing: With the global economy headed for what many expect to be a nasty recession, the inflationary pressures that looked so menacing in the summer have quickly dissipated. The government reported in November that the core consumer price index — a measure of inflation that excludes volatile food and energy prices — decreased by 0.1% in October from the previous month, a sharp decline from the 0.3% monthly increase posted in July. At the same time, crude oil has plummeted from more than $140 a barrel in the summer to less than $50 a barrel in December. When inflation eases, yields on government bonds—such as the 10-year Treasury note — tend to drift lower. And because 30-year fixed mortgage rates typically track the yields on 10-year Treasuries, the diminished inflationary outlook has helped pull rates down. "The sudden collapse in prices has changed things dramatically," Gumbinger says. "That was really one of the linchpins as to why rates finally did fall."


3. Recession: The National Bureau of Economic Research recently announced that the United States did indeed enter a recession in December 2007. While predictions as to the duration and depth of the recession vary, economists at Goldman Sachs recently revised their original forecast in the face of deteriorating economic news. "This deepens and extends the expected recession, bringing the drop in GDP close to the decline seen in 1982 (2.3% in our forecast versus 2.7% then)," the economists said in the report.


The recession is likely to put additional downward pressure on mortgage rates in two key ways. First, the economic contraction will work to stifle inflation. And second, it will support the ongoing "flight to quality," whereby investors move cash from more risky investments — such as stocks — to ultrasafe government securities. Such forces are already bringing yields on government bonds sharply lower. Ten-year Treasury yields fell to 2.66% during the week of Dec. 5, from 4.02% just seven weeks earlier. "You are seeing nominal Treasury yields at new multidecade and, in some cases, all-time lows," Larson says. "[This] should add downward pressure on mortgage rates as well."


4. Government action: The outlook for mortgage rates has also been influenced by recently announced government initiatives. In late November, the Federal Reserve announced plans to buy up hundreds of billions of dollars in debt and mortgage-backed securities from government-controlled mortgage finance giants Fannie Mae and Freddie Mac. The plan is designed to reduce Fannie's and Freddie's financing costs, thereby enabling them to pass savings on to individuals in the form of lower mortgage rates. The Fed has since suggested it may begin buying long-term Treasury bonds, which could bring 10-year Treasury yields even lower. These announcements triggered an immediate drop in mortgage rates and could continue to keep rates low in the coming months. And while the massive bailout initiatives that governments around the world are now undertaking will undoubtedly lead to renewed inflationary pressures, this impact is unlikely to materialize until 2010, Gumbinger says.


5. Housing market turmoil: The decline in home prices, coupled with rising mortgage delinquencies and foreclosures, has prompted investors to demand higher returns on their investments in securities backed by home loans. As a result, the spread — or the difference — between the yields on 10-year Treasuries and 30-year fixed mortgage rates has widened significantly. This spread expanded to nearly 3 percentage points in the week of Dec. 5, from 1.5 percentage points in the first week of June 2007, before the credit crisis struck. And with home prices expected to continue falling throughout at least the first half of 2009 — and mortgage delinquencies accelerating — this "risk premium" should remain elevated. "We're not going to get back to the same tight relationship between the 10-year [Treasury] bond and fixed mortgage rates any time soon," says Tom Vanderwell, a mortgage lender from Michigan. But despite this upward pressure, Vanderwell says he expects mortgage rates to finish 2009 somewhere between 6% and 6.25%.

6. Lending standards: Although mortgage rates are likely to remain attractive next year, not everyone will be able to take advantage of them. Many homeowners with adjustable-rate mortgages who would like to refinance into more affordable, fixed-rate home loans have negative equity, meaning they owe more on their mortgage than their home is worth. As a result, they will not be eligible for refinancing. Meanwhile, those looking to purchase a home will face a credit environment that is significantly tighter than in the housing boom days. In order to access today's most attractive rates, borrowers will have to be able to document their income, make a down payment and have good credit. Mark Hanson, a managing director who handles real-estate and finance research at the Field Check Group, says there aren't a great deal of potential homebuyers in the market today "who have jobs, two years of tax returns, [who] are qualified, and have saved a large enough down payment."


7. No rush: But even though rates may be low today, Larson says qualified borrowers shouldn't feel pressured to see their lender immediately. "This is a lot less of a situation where you've got a temporary spike lower that if you don't get out the door in 48 hours, these rates are going to be gone," Larson says. "This is more of a longer-lasting trend where — sure, you will see some fluctuations — but that the trend in rates is probably lower for a number of months."


By Luke Mullins, U.S. News & World Report

7 tips for surviving the credit crunch

1. Verify the status quo"Step one is to make sure that you do, in fact, still have the same terms that you had originally," says Ulzheimer. Check not only the interest rate on your account, he says, but the credit limit and the grace period. Issuers sometimes shorten grace periods on accounts that aren't generating much revenue.


2. Avoid 'atypical' activity Consumers spend in patterns, so any atypical moves could cause a drop in your credit score and attract scrutiny from your issuer, Ulzheimer cautions. "You don't want to all of a sudden start revolving a balance just for the heck of it because you want to put more money toward your 401(k) or put more money toward other investments or stick more money in savings. If you have the ability to continue to pay in full, it's probably a good idea to continue to do so."
Ditto multiple balance transfers and credit application sprees. Like someone passing a police car, you don't want to do anything that looks suspicious.


3. Keep up the good payment history Always pay on time, keep balances low and pay them off every month, if possible. The higher your balances, the riskier you look.



4. Don't neglect other bills Utility companies and other service providers sometimes report payment information to the credit-reporting companies, says Steven Katz, director of consumer communications for TransUnion's TrueCredit.com. An unpaid medical bill, for example, could wind up as a derogatory item on your credit report, bringing down your credit score.


5. Check your credit reports Make sure your credit reports contain accurate information, because inaccurate, derogatory marks could damage your credit scores. Pull a different report every four months from one of the three major credit-reporting agencies by going to http://www.bankrate.com/msn/news/cc/www.annualcreditreport.com. You're entitled to a free credit report from each bureau every 12 months.


6. Plan ahead if missing a payment If you know you're going to miss a payment, don't wait for a collector to call about the delinquent debt. Contact your issuer in advance to see if you can work out a payment plan.
Hardekopf advises calling your issuer to explain why you're going to miss a payment. Emphasize your good payment history and say that while you don't want to see your interest rate skyrocket, you aren't trying to skip out on the bill. Ask if a payment plan could be arranged.


7. Read 'junk mail' from your issuers People who don't open correspondence from their issuers may get rude surprises. According to the Truth in Lending Act, an issuer has to give only 15 days' advance written notice before taking an adverse action -- an undesirable change to the terms of your card agreement.

**Information provided courtesy of Bankrate.com