Let’s start with the bottom line here:    Don’t take out a loan or advance on the tax refund that you are expecting.   Period.  End of story.   If you want your money quickly, just file electronically and tell the IRS to direct deposit your refund to your bank account.  If you made $56,000 or less in 2008, you may qualify to file your federal taxes for free.  If you do direct deposit, and there aren’t any issues, you’ll have your refund in two weeks or less — it may take another week or so if the IRS mails your check.   After you file, you can check the status of your refund online.

So, if you take out a refund anticipation loan, you are borrowing against money you’ll see within about one to three weeks.   For that privilege, you’ll pay a very high cost.  We won’t go into the math here, because fees and rates vary wildly across preparers, but the effective APR (all the costs of the loan annualized for a full year) is often north of 100%. It may not seem like the cost is that high, because you only are actually borrowing for a couple weeks, but maybe this example will help:

Let’s say you get a $1,000 loan for two weeks and it costs you $50 in fees and interest.    If you were to put that money in a bank account earning 2% interest (a pretty good rate right now), you would earn about 77 cents.   So, basically, someone is charging you $50 for money that is costing them less than $1.00.

About 8.7 million people took out these loans in 2007.  Don’t be one of them in 2009.   For more information, read this release from the Consumer Federation of America & National Consumer Law Center.

Recommendations:

1. Get a completely free credit report

Annual Savings Potential:  About $180 over a credit monitoring service, although they aren’t exactly the same thing

Discussion Once per year, as a result of a government agreement with the credit report industry, you are entitled to a free copy of your credit report (although not your credit score) from all three major credit bureaus.   This site serves as a central clearinghouse for that program, and there is no charge.    This is different than FreeCreditReport.com, whose commercials are papered all over television.  That service offers you a free credit report, including your credit score.  However, it comes with the requirement that you enroll in their credit monitoring program called Triple Advantage.   You have seven days to cancel, or you are billed $14.95/month.

Some may benefit from the ongoing monitoring of FreeCreditReport.com, but if you just need a one-time check of  your credit, the free site in the recommendation is just fine. Note also that if you are ever turned down for credit based on your credit report,  the Fair Credit Reporting Act specifies that you must be alerted to that fact and will have an opportunity to see the credit report relied on to turn you down.

Recommendations:

1. Check your break-even point on a refinance
2. Refinance (if it makes sense) while rates are low

Annual Savings Potential: Can be thousands of dollars/year

Discussion   Mortgage rates are at levels that haven’t been seen in 40 years or more.  The weak economy, coupled with government efforts to push rates down to make housing more attractive, is making this a once-in-a-generation opportunity for those with good credit to refinance.    The first thing to look at, of course, is whether current mortgage rates are lower than what you are currently paying.  If not, then there’s nothing to see here (unless you are on a variable rate that may spike up in the not-too-distant future).

For most people, current rates provide an opportunity to save tens of thousands in interest over the life of a mortgage.   However, because there are front-loaded costs associated with most mortgage financing, it isn’t as simple as comparing rate A to rate B.   At a high level, here are the two approaches you can take:

• If you plan on staying in the home for many years, look for the lowest interest rate option offered by your bank.  You may have several options, with lower rates coming with more origination costs (points).   You’ll pay more today, and your break-even period will be longer but you’ll end up paying the least interest in the long run
• If you don’t know how long you’ll stay in the home, or want to minimize out-of-pocket costs at closing, shop for the lowest rate that includes 0% origination fee.   In this scenario, your break-even is sooner, although your monthly payment will be a bit higher and, if you end up in the home for a long time, you’ll pay more interest.

Another suggestion to minimize out-of-pocket costs at closing is to have them rolled into the loan.   This will increase the principal balance (amount you are borrowing), slightly increasing your monthly payments.

I received a letter from my mortgage company earlier in the week that contained a fascinating proposal. If I were to take my monthly mortgage payment and pay half of it every two weeks, I could pay off my mortgage six years early, and save tens of thousands of dollars in interest.

By itself, this isn’t such a bad idea. The reason it works is that by paying every two weeks, you end up making 13 full mortgage payments a year, instead of 12. This accelerates your repayment of principal.

The idiotic part is that the bank wants me to pay $295 to enroll in the program and then pay $5.42 a month in participation fees. If I were to participate until my mortgage was repaid, that would be a total of a little over $1,800.

Okay, let me understand this….. the bank is asking me to pay $1,800 for something I CAN DO MYSELF!! This is truly remarkable and (in my opinion) a completely irresponsible promotion.

If you are interested in doing something like this, it is very simple to set up, especially if you have online banking. Just set up a recurring payment of 1/2 your mortgage payment every two weeks and you are done. 30 seconds of work and you’ve saved all that interest plus $1,800. By the way, there’s nothing magical about every two weeks, either…. you can make these extra payments whenever you want. The more principal you pay early, the less interest you’ll have down the road.  To see how much you can save by prepaying, use this calculator. 

Obviously, you’ll want to make sure that there are no prepayment penalties associated with your mortgage before embarking on an early repayment program like this.

Ilyce Glink, syndicated columnist of “Real Estate Matters” and best-selling author of several books for the prospective home buyer or seller has just launched a new video-centric website of Expert Real Estate Tips.   The site includes useful information for all facets of the process, including buying, financing, improving, staging and selling a home.    Check it out!

Separately, mortgage rates have dropped significantly in recent months, as the government works to ease the downturn in housing.   If you have reasonably good credit, you might be able to save tens of thousands of dollars in interest by refinancing at these new lower rates.