Begin Providing for Your Future

Anyone familiar with the time value of money knows that even small amounts, when compounded over long periods, can result in thousands, or even millions, of dollars in additional wealth. This simple truth

is one of the reasons many financial planners recommend tax-advantaged accounts and investments such as traditional / Roth IRA’s and municipal bonds. In the past, these decisions were not as crucial because of the prevalence of defined-benefit pension plans. Today, those old-world pensions are going by the wayside at many U.S. firms; instead, most of today’s workforce is likely to find their retirement years funded by the proceeds of their 401k retirement plan.

What is a 401k retirement plan?

A 401k retirement plan is a special type of account funded through pre-tax payroll deductions. The funds in the account can be invested in a number of different stocks, bonds, mutual funds or other assets, and are not taxed on any capital gains, dividends, or interest until they are withdrawn. The retirement savings vehicle was created by Congress in 1981 and gets its name from the section of the Internal Revenue Code that describes it; you guess it - section 401k.

What are the benefits of a 401k retirement plan?

There are five key benefits that make investing through a 401k retirement plan particularly attractive. They are:

• Tax advantage
• Employer match programs
• Investment customization and flexibility
• Portability
• Loan and hardship withdrawals

Tax advantage of 401k retirement plans

As touched on in the introduction, the primary benefit of a 401k retirement plan is the favorable tax treatment it receives from Uncle Sam. Dividend, interest, and capital gains are not taxed until they are disbursed; in the mean time, they can compound tax-deferred inside the account. In the case of a young worker with three or four decades ahead of them, this can mean can mean the difference between living at the Plaza Hotel or the Budget 8.

Employer match for 401k retirement plans

Many employers, in an effort to attract and retain talent, offer to match a certain percentage of the employee’s contribution. According to Starbucks’ “Total Pay Package” brochure, for example, the company will match a percentage of the first 4% of pay the employee contributes to their 401(k) retirement plan. Employees at the company for less than 36 months receive a 25% match; 36 to 60 months receive a 50% match; 60 to 120 months receive a 75% match; 120 or more months receive a 150% match.

In other words, an employee working at the coffee giant for over ten years earning $100,000 that contributed $4,000 to their 401(k) would receive a $6,000 deposit in the account directly from the company (150% match on $4,000 contribution.) Anything the employee deposited above the 4% threshold would not receive a match.

Even if you have high-interest credit card debt, it is preferable, in almost all cases, to contribute the maximum amount your company will match! The reason is simple math: If you are paying 20% on a credit card and your company is matching you dollar-for-dollar (a 100% return), you are going to end up poorer by paying off the debt. Factor in the tax-deferred gains generated by the 401(k) plan, and the disparity becomes even larger. For more information on this topic, I suggest you read the work of Suze Orman.

Although the topic will be discussed in further detail later in this article, be aware that employer matching contributions up to six-percent of an employee’s pre-tax salary are not included in the annual limit. For example, if you qualified, you could make a 401k contribution of $13,000 in 2004 and have your employer still match the first six-percent of your salary; that match would be deposited above and beyond the $13,000 you contributed directly.

Investment customization and flexibility

401k retirement plans give employees a range of choices as to how their assets are invested. An individual that knows he or she does not have a high tolerance for risk could opt for a higher asset allocation in low-risk investments such as short-term bonds; likewise, a young professional interested in building long-term wealth could place a heavier emphasis on equities. Many businesses allow employees to acquire company stock for their 401k retirement plan at a discount although many financial advisors recommend against holding a substantial portion of your 401k in the shares of your employer in light of the Enron and Worldcom scandals.

One of the benefits of a 401k retirement plan is that it can follow an employee throughout his or her career. When changing employers, the investor has four options:

1.) Leave his/her assets in the old employer’s 401k retirement plan
Many 401k plan administrators charge record keeping and other fees to manage your account, regardless of whether you are still with the company. These fees can take a significant bite out of your future net worth, especially if you have accounts maintained at several different employers.

2.) Complete a 401k rollover to the new employer’s 401k plan
Practically speaking, this option is only available if the employee has another job offer before leaving their current employer. In some cases, it may be the best option as it is simple. How do you know if it is the right choice? The decision should largely be made based on the investment options of the new 401k plan. If you are unsatisfied with the choices available to you, completing a 401k rollover to an IRA may be a better option.

3.) Complete a 401k rollover and move the assets to an Individual Retirement Account (IRA)
Completing a 401k rollover is almost always the best choice for those interested in providing for a comfortable retirement because it allows the investor’s capital to continue compounding tax-deferred while providing maximum control over asset allocation (i.e., you aren’t limited to the investments offered by the 401k plan provider.) Here’s how it works: A distribution of the current 401k plan assets is ordered (this is reported on the IRS Form 1099-R.) Once the assets are received by the employee, they must be contributed into the new retirement plan within sixty days; this deposit is reported on IRS Form 5498. The government limits 401k rollovers to once every twelve months.

4.) Cash out the proceeds, paying taxes and the 10% penalty fee
With the exception of failing to take advantage of an employer’s contribution match program, cashing out a 401k when leaving jobs is the single most stupid decision a working individual can make. According to a press release by the 401K Help Center, research indicates “as many as 66 percent of Generation X job changers take cash when leaving their jobs, and 78 percent of workers aged 20-29 take cash.” The tragedy is far greater than the taxes and penalty fee alone; indeed, the greater financial loss comes from the decades of tax-deferred compounding that capital could have earned had the account owner chosen to initiate a 401k rollover.

The purpose of your 401k retirement plan is to provide for your golden years. There are times, however, when you need cash and there are no viable options other than to tap your nest egg. For this reason, the government allows plan administrators to offer 401k loans to participants (be aware that the government doesn’t require this and therefore it is not always available.)

The primary benefit of 401k loans is that the proceeds are not subject to taxes or the ten-percent penalty fee except in the event of default. The government does not set guidelines or restrictions on the uses for 401k loans. Many employers, however, do; these can include minimum loan balances (usually $1,000) and the number of loans outstanding at any time in order to reduce administrative costs. Additionally, some employers require that married employees get the consent of their spouse before taking out a loan, the theory being that both are affected by the decision.

401k Loan Limits

In most cases, an employee can borrow up to fifty-percent of their vested account balance up to a maximum of $50,000. If the employee has taken out a 401k loan in the previous twelve months, they will only be able to borrow fifty-percent of their vested account balance up to $50,000, less the outstanding balance on the previous loan. The 401k loan must be paid back over the subsequent five years with the exception of home purchases, which are eligible for a longer time horizon.

401k Loan Interest Expense

Even though you’re borrowing from yourself, you still have to pay interest! Most plans set the standard interest rate at prime plus an additional one or two percent. The benefit is two-fold: 1.) unlike interest paid to a bank, you will eventually get this money back in the form of qualified disbursements at or near retirement, and 2.) the interest you pay back into your 401k plan is tax-sheltered.

The Drawbacks of 401k Loans

The biggest danger of taking out a 401k loan is that it will disrupt the dollar cost averaging process. This has the potential to significantly lower long-term results. Another consideration is employment stability; if an employee quits or is terminated, the 401k loan must be repaid in full, normally within sixty days. Should the plan participant fail to meet the deadline, a default would be declared and penalty-fees and taxes assessed.

401k Hardship Withdrawal

What if your employer doesn’t offer 401k loans or you are not eligible? It may still be possible for you to access cash if the following four conditions are met (note that the government does not require employers to provide 401k hardship withdrawals, so you must check with your plan administrator):

1. The withdrawal is necessary due to an immediate and severe financial need
2. The withdrawal is necessary to satisfy that need (i.e., you can’t get the money elsewhere)
3. The amount of the loan does not exceed the amount of the need
4. You have already obtained all distributable or non-taxable loans available under your 401k plan

If these conditions are met, the funds can be withdrawn and used for one of the following five purposes:

1. A primary home purchase
2. Higher education tuition, room and board and fees for the next twelve months for you, your spouse, your dependents or children (even if they are no longer dependent upon you)
3. To prevent eviction from your home or foreclosure on your primary residence
4. Severe financial hardship
5. Tax-deductible medical expenses that are not reimbursed for you, your spouse or your dependents

All 401k hardship withdrawals are subject to taxes and the ten-percent penalty. This means that a $10,000 withdrawal can result in not only significantly less cash in your pocket (possibly as little as $6,500 or $7,500), but causes you to forgo forever the tax-deferred growth that could have been generated by those assets. 401k hardship withdrawal proceeds cannot be returned to the account once the disbursement has been made.

Non-Financial Hardship 401k Withdrawal

Although the investor must still pay taxes on non-financial hardship withdrawals, the ten-percent penalty fee is waived. There are five ways to qualify:

1. You become totally and permanently disabled
2. Your medical debts exceed 7.5 percent of your adjusted gross income
3. A court of law has ordered you to give the funds to your divorced spouse, a child, or a dependent
4. You are permanently laid off, terminated, quit, or retire early in the same year you turn 55 or later
5. You are permanently laid off, terminated, quit, or retired and have established a payment schedule of regular withdrawals in equal amounts of the rest of your expected natural life. Once the first withdrawal has been made, the investor is required to continue taking them for five years or until he/she reaches the age of 59 1/2, whichever is longer.

A 401k hardship withdrawal should be a last resort. An IRA, for example, has a lifetime withdrawal exemption of $10,000 for a house with no strings attached.

What is the maximum contribution limit on your 401k account? The answer depends on your plan, your salary, and government guidelines. In short, your contribution limit is the lower of the maximum amount your employer permits as a percentage of salary (e.g., if your employer lets you contribute 4% of your salary and you earn pre-tax $20,000, your maximum contribution limit is $800), or the government guidelines as follows:

401k Maximum Contribution Limits
2004: $13,000
2005: $14,000
2006: $15,000

Once the year 2006 has been reached, the total maximum contribution limit will be increased based on changes in the cost of living.

Catch Up Contributions

If you are fifty years or older and your employer offers “catch-up” contribution for your 401k, you are eligible to contribute additional amounts up to the maximum contribution limits as follow:

401k Maximum Catch-Up Contribution Limits
2004: $3,000
2005: $4,000
2006: $5,000

Once the year 2006 has been reached, the total maximum contribution limit will be increased based on changes in the cost of living.

A Reminder on Employer Matching Contributions and 401k Contribution Limits

Once again, employer matching contributions up to six-percent of an employee’s pre-tax salary are not included in the contribution. For example, if you qualified, you could make a 401k contribution of $13,000 in 2004 and have your employer still match the first six-percent of your salary; that match would be deposited above and beyond the $13,000 you contributed directly.

The Secret To Making Money Online

What Is The Stock Market

What is the stock market? This is a great question. Being a budding stock investor myself I went on a search for an answer to the question “What is the stock market”. I believe that what I have found will help any beginner in understanding what the stock market it and how it works.

WHAT IS THE STOCK MARKET?

The word stock simply refers to a supple. You can have a stock of anything you want (from pencils in your pencil case, to clothes on your wardrobe). In the financial market stock refers to a supply of money that a company has raised. This supply comes from people who have given the company money in the hope that the company will make their money grow.

A market is a public place where things are bought and sold. The term “stock market” refers to the business of buying and selling stock. The stock market is not a specific place, though some people use the term “Wall Street”—the main street in New York City’s financial district—to refer to the U.S. stock market in general.

WHY DO COMPANIES SELL STOCK?

If a company wants to grow and expand then they need money to do that. They might need money to build factories, or shops or to hire more workers. In order to do that they need money, they could go to the bank and get a loan but then they would be in large amounts of debt. Instead, they can sell the business to get more money, but continue to control the business. How? They sell it to hundreds and even thousands of people in what is known as shares.

If you have a pie and you cut it into 100 pieces (it must be a pretty big pie), then each person would have a ”share” of the pie. It is the same with companies. Companies sell shares to people. Say a company sells 100 shares and you own 1 share then you would own 1% of the business. People who buy the stock (or the shares) are giving the company the money it needs to grow and expand.

WHY DO PEOPLE BUY SHARES?

The people who own the shares own a part of the company they have shares in. Therefore whenever the company makes money the shareholders (the people who own the stock/shares) get part of the profits that the company made. If the company makes money then the stockholders share in the profits and over time owning stock will earn people more money than leaving their money in the bank or making other

Stockholders in a company also usually have voting rights. They vote on such issues as who will be elected to the board of directors—the group of people who oversee company decisions—and whether to buy other companies. Stockholders typically have one vote for each share they own. Every vote counts, but a stockholder with 5,000 shares will have more influence on the company than someone with only one share.

WHAT ARE CAPITAL GAINS ON SHARES?

As a company makes money, the value of its stock goes up. It is similar to if you owned a restaurant. If your restaurant started off making $50,000/year then you might be able to sell it for $500,000. But say later on your restaurant was earning $100,000/year, then the resaurant might well be worth $1,000,000. It is the same with stocks, you own a percentage of that restaurant so as their profits increase your ’stock’ becomes more valuable as it is part of the business. This increase is value is called ‘capital gains’

Well I hope that helped explain some things about the stock market and I hope you now understand what the stock market is and how it works on the most basic level. Please leave any comments and questions below.

Tips on Saving For a House Deposit

So your thinking of investing into real estate? But you don’t have a house deposit and you want to save one. Need some tips on saving for a house deposit. This is a great (and often nessecary) thing to do before you begin to invest into the real estate market. Saving $60,000 may sound like a lot of money, but if you think about the massive investment you are becoming involved in (around $300,000 or above) then $60,000 doesn’t sound like that much.

What are the advantages of saving a house deposit?

* You don’t have to pay Lenders Mortgage Insurance

Banks and lenders often charge a fee known as Lenders Mortgage Insurance when you cannot come up with your 20% deposit. This is to insure the loan in the case that you cannot pay it back and that the house is no longer worth as much as the loan. The less of a deposit you have the higher the fee you have to pay.

* You can get a loan easier

Banks and lenders will be much happier to give you a loan with a higer deposit. This means there is less risk for them, and banks hate risk.

* You can build equity quicker

With a larger deposit, you have lower fees, lower interest rates and less money to pay back. Therefore the interest that you pay decreases significantly. This means that your loan will go down faster, and as your properties equity rises this allows you to build equity faster. Equity = Total value - total debt. Therefore if you decrease the debt quicker you increase your equity.

So what tips can I give you to help you save for a house deposit?

* Have a Goal

Have a goal of how much you want to save and when you want to have that amount saved by. Make it realistic, but also make it a decent goal worth aiming for. Studies have shown that people with strong goals achieve much more than people without goals. So set a strong goal, and then work out how you can work towards it. You may have to make some sacrifices, you may have to be flexible with your money, but set goals and work to achieve them.

* Cut Your Spending

Having a budget and cutting your spending are the first things your are going to have to look at when saving for a home loan. Obviously you want to save for a home loan as quickly as you can and in order to do that you will need to cut your spending. Often this doesn’t even involve much sacrifice (just buying clothes out of season, or shopping when the specials are on, or sales).

* Bank Your Excess

The only reason you cut your spending is so you have excess left over. You need to bank this excess (don’t just spend it on something else). “Bank little, bank lots”, it is amazing how every little bit accumulates into something much larger. Get in the habit of banking on a regular basis and leave the money in there.

* Start Earning More Money

This can be as simple as picking up a few extra hours at work, or maybe getting a second job. Better yet, why not work smarter instead of harder and earn more money for working less hours? There are many ways to do this. Personally I have chosen to make some extra money online by selling great financial training resources (CLICK HERE to buy my resources). Find ways to make extra money, and then bank ALL of it.

* Invest your money while saving

Many people when saving a home deposit just put their money in a bank account that charges them money to have it there. Why not open an online savings account at least? You can easily earn 7% on your money for doing nothing (and you can access it whenever you want for many of the online savings accounts). Say you wanted to save up $60,000 over 2 years. You saved $30,000 in the first year. If you invested that and earnt just 7% per year on that by the end of your second year it would have made you over $2,100 for doing nothing. So as you save your money invest it straight away and let your money do the work for you.

* Be Flexible

This is my last tip and it simply talks about the minset you need to have. You need to be willing to be flexible. Don’t be rigid and stick to your ways, be open minded and always looking for new ways to make some extra cash or save some extra cash. Have a mind that is open and wants to learn new things, then next time you need to save up it will be easier also. So be flexible to changes and keep an open mind

How To Start Doing Home Renovations - Starting Small

You can make a lot of money in real estate through development and renovation. However, many people go into renovating with the goal of doing a massive house, knocking down walls, changing floor plans and room layouts on their first try. If you have ever watched the show property ladder the key to being a successful developer is starting out small and then continually improving and doing bigger scale properties as you learn and as your skill set improves.

I advise that if you really want to get into property development as a money making strategy, or possibly even a full time job then you start small. What are the two main advantages of starting small?

* There is less risk

Firstly there is less monetary risk involved. You can start by investing in units and you risk a lot less if you fail. You will only need a small deposit to start, and then even if you fail then you only stand to lose a few grand. Where as if you started with a massive property you risk losing a lot more money (and if you do this can put you out of the property gain for a longtime). So starting small is good because there is less risk when you don’t really know what you are doing

* You can learn as you go

Starting on smaller sized property developments allows you to build up your skill base over time, as you learn about developing and you can develop skills in trade and different areas you need for property development. A lot of people under estimate their skill level (especially when it comes to managing a property development). If you start small you can build up your skill base and then you will be ready to do larger properties.

So now that you know the advantages that there are to starting small and building from there, then how to you start small? How can you get into the property game. What are a few tips I can offer you on how to start doing home renovations.

* Save up a deposit

Saving up a deposit is your first step towards starting your property development. Saving up a deposit can seem hard, but with a few practical steps it can actually be easier than you think. The more you save the easier it will be to get a loan and the less your costs in repayments will be. Even if you only plan on holding a property for a few months and then reselling a sufficient deposit can mean less fees and more profit in your pocket. CLICK HERE to Read More on Saving Up for your House/Unit Deposit.

* Do Your Research

Doing you research is going to be vital to your success. Firstly research how to do property development and learn all your can from books and seminars and training session. Some things you will have to learn on the job but there are many things you can learn before which will save you a lot of time and money. So research how to do property devlopment well. Secondly, research your price range. What can and can’t you afford. What areas can you afford in. Be realistic. Thirdly, research the area in which you want to buy. Look at who lives there are who your target market is (familiys, old couples, newly weds, singles). If you know your target market you can develop your property to suit them making you more money.

* Be Patient

Don’t just go out and buy the first house you see on the market. Be patient. The real estate market is flooded with properties which just aren’t right for you, wait for the right one, it will make the difference between a profit and a loss. Often waiting 6 months or more means you can find the right property for you that is cheap and great value and you can make a much larger profit than if you just jumped into it. So be patient.

* Learn from Skilled people

Many people when they start out developing want to do all the work themselves to save money. This can be useful if you have the time, but many people don’t. If and when you do get skilled people to work from you, follow them around and ask them questions. Learn everything you can from them so next time around you can do it yourself, or at least you can not get ripped off. Don’t worry if you annoy them a little bit, think of all the future properties you will do in which you will need that information.

* Be willing to take a risk

This is the final step and the hardest one for most people. Many people learn how to do development. They read the books and go to the seminars, but they never take the risk and take action.

Don’t be afraid of failing. Failing means you can learn something not to do next time. Be always learning from your mistakes and always seeking to improve. Then even if the risk you take turns out a failure you are all the more wiser for next time.

So when it comes to home renovations, start small. Start with apartments doing simple face lifts and making the place look nice. Then once you feel you have mastered that move onto bigger and better things.

Save Money For Your Home Deposit and Save The Environment Too

This guest article comes from our friends at www.saveforhouse.com. Check them out

With more of us searching for ways to contribute to a greener environment, there are some simple money saving tactics that can help you save for your down payment for your new home and still help contribute to improving our environment.
Save Money By Going Green At The Grocery Store

When we shop, we bring our groceries home in either paper sacks or plastic sacks. If you pay for your trash, paper and plastic bags not only increase your costs for trash removal but they spend time in landfills contributing to our environmental woes. Buying re-usable bags and using them each time you go to the grocery store will not only help protect our environment but will also help you save money towards your down payment.
Bike Don’t Drive & Save Money On Gas

One of the most common threats to our environment is the emissions from our cars. Using your bike to accomplish local errands such as going to the post office, the bank or even driving to work one day a week can help save money on gas (significant at today’s prices) and put that savings towards your down payment on your home while contributing to the environment.
Reduce Electricity Costs

We all have left our homes with the lights on, the bathroom fan running or left the heat on too high. There are hundreds of inexpensive timers that are available today that can regulate our lights or heat to save some serious money. Making a small investment in a timer today can pay long term benefits in saving money towards your down payment and reducing your impact on the environment at the same time.
Saving Money By Reducing Water Consumption

While this may sound impossible to do, it’s really a lot easier than you might think. Bathing instead of showering uses much more water, running water to brush your teeth and running water to rinse dishes all use up excess amounts of water. You can save money on your water bill and use those savings towards your down payment by filling your sink with water to rinse dishes (instead of running water to rinse), filling up a cup to rinse your teeth (versus running the water to do that) and also by showering instead of bathing.
Making More Money While Helping The Environment

What about some green environment tips that can actually make you some extra money? Let’s take a look at some of the fun ways you and your family can help protect the environment and even make or save a few dollars in the process!

* Returnable Cans And Bottles - Consider getting your family involved in a clean up of your neighborhood streets or a local playground. These areas are often ripe with discarded bottles and cans which can add to your savings for your home down payment. You will be contributing to not only helping our environment but also helping improve the look of your neighborhood.
* Using Food Waste And Yard Waste - Consider composting your yard waste and food waste. This waste makes great fertilizer and can save funds that will allow you to increase your savings towards your home down payment. Fertilizer is expensive but using mulching materials that you have in your own home to fertilize your flowers and lawn can result in a significant savings.
* Recycling Paper And Tin - Check in your area if there are centers that will pay you for recycling your paper and tin. These places are often available in your local supermarket parking lot. Even if they will not pay you, recycle your paper and tin to help out the environment.

Protecting the environment and saving money can go hand in hand. Apply as many of these tips as possible and you will be giving back and helping the community while saving money. Looking for more tips on how to save money while going green? You may want to check out this article with 10 ways to go green and save money at the same time.

Tips For Selling Your Home Fast In Today’s Market

1. Price your home aggressively - Look at the other homes in your neighborhood that have sold in the past three months (except for distressed sales) and price your home below the lowest sales price. If there are active listings in your neighborhood the price you select must also be below that of the most comparable home to yours.

2. Make your home the neighborhood showplace - Updated kitchens and baths are what hook most new home shoppers. Look to install granite countertops, stainless steel appliances, and new ceramic or hardwood floors. Carpets should be as nearly new as possible. Add a new coat of paint to your home’s interior and exterior.

3. Enhance Your Home’s “Curb Appeal” - Avoid the appearance of a “drab” yard by planting colorful flowers in selected locations. Seed or plant sod in areas lacking grass. Make certain the yard is mowed, edged and mulched.

4. Clutter Must Go - Even the most up-to-date house will look disorganized if it is filled with unnecessary furniture. Remove all furniture you do not absolutely need. Also, remove personal items (including family photos and portraits). Prospective buyers want to imagine a house with their own things in it, not yours.

5. Make Certain Your Home is Properly Staged - Consider hiring a professional to “stage” your house before prospective buyers begin coming through your door, especially if your house has been vacant for a while. A professional stager will generally charge between $1,000 and $2,000, and arrange home furnishings so that prospects can more easily envision their own furniture in the house. At the same time, an experienced stager can add a touch of class to your home.

6. Don’t Forget Financial Incentives - Offer buyers’ agents a four percent commission rather than the traditional three percent, along with closing cost assistance to buyers. Closing cost assistance is especially attractive now that credit has tightened significantly and 100% loans are next to impossible to obtain.

Homes that take months to sell often require the asking price to be cut multiple times. Additional costs to the seller include continuing mortgage payments, utilities, taxes and insurance, repairs and other associated costs. Following the six tips outlined above can help to greatly reduce the amount of time it takes to sell a home in today’s market

Some buy a new home to bail on the old
Next month, Michelle Augustine plans to walk away from her four-bedroom house in a Sacramento, Calif., subdivision and let the property fall into foreclosure. But before doing so, she hopes to lock in the purchase of another home nearby.

“I can find the same exact house as what I live in right now for half the price,” says Ms. Augustine, 44 years old, who runs a child-care service out of her home. She says she soon will be unable to afford her monthly payments, which will jump to $4,000 from $3,300 in August, and she doesn’t want to continue to own a home that is now worth $200,000 less than what she paid for it two years ago.

In markets hit hardest by falling home prices and rising foreclosures, lenders and brokers are discovering a new phenomenon: the “buy and bail,” in which borrowers with good credit buy a new home - often at a much lower price - then bail out of the “upside down” mortgage on their first home.

Homeowners are able to pull off this gambit - which some lenders and real-estate agents call mortgage by taking advantage of mortgage-lending practices that allow them to buy a new primary residence before their existing residence has been sold. And with the lending industry in disarray as it tries to restructure millions of mortgages, some boast they are able to pull off the strategy with ease. In some cases, homeowners are coached through the buy-and-bail process by real-estate agents and brokers who see nothing wrong with it. Some blame the phenomenon in part on lenders’ unwillingness to cut deals or restructure loans made when home prices were inflated. “It’s just a <a class=”iAs” style=”border-bottom: 0.075em solid darkgreen ! important; font-weight: normal ! important; font-size: 100% ! important; text-decoration: underline ! important; padding-bottom: 1px ! important; color: darkgreen ! important; background-color: transparent ! important;” decision,” says Linda Caoili, a Sacramento real-estate agent who is working with Ms. Augustine and others who are considering walking away from their mortgages. “If you’re upside-down $250,000, why would you keep it? It just doesn’t make sense.”

To be sure, walking away from a mortgage, even if legal, has plenty of drawbacks: Borrowers lose the ability to take out unsecured loans, since foreclosures can stay on a credit report for seven years. In some states, lenders can sue for assets, including a new house. Fannie Mae, the government-sponsored mortgage underwriter, recently revised the amount of time borrowers with a foreclosure must wait to receive a home loan to five years from four. Proposed Fannie Mae guidelines, which could take effect later this month, also would require those borrowers to make a 10 percent down payment and meet a minimum credit score after the five-year period. While buy-and-bail is on the rise, the practice doesn’t appear to be widespread. Credit is much tighter now than it was during the real-estate boom, and most families with an upside-down mortgage likely will hold on to their homes and hope the market improves in the future - even though many of them could lose their properties. Still, with home prices falling rapidly in some parts of the country, a growing number of frustrated consumers are willing to take the risk - especially in so-called nondeficiency states such as California and Arizona, where it is more difficult for a lender to sue consumers who walk away from their mortgages. Borrowers who bought or refinanced their home with a personal line of credit, however, instead of a home-purchase loan - a common practice during the housing boom - could be sued by a lender in those states. Borrowers also could be on the hook if lenders can show that homeowners committed fraud by misrepresenting themselves on their loan application.

Yet even in cases in which a lender could attach a lien on the new home, some homeowners simply assume that lenders are too swamped. “So many people are foreclosing, is it cost effective for lenders to go after all of these people?” says Steve Hawks, a Las Vegas real-estate agent who handles lender-owned properties. That works in the favor of borrowers such as Blair Morrow. Last year, he rented out his Sacramento home when he moved to Houston for a new job, but he lost those renters in February. He quickly arranged to buy a new home in Houston, fearing that his old residence would be foreclosed and he would take a big hit on his credit. “I had 30 days to make a decision: Live in a rental house the rest of my life or buy a house and walk away from the one in California,” says Mr. Morrow, 56, who works at a car dealership. He wrestled with the decision for a while, but justified it once Countrywide Financial Corp., the lender for his first home, approved the new home loan. “Countrywide didn’t say peep,” he says. Countrywide didn’t return calls seeking comment. Ms. Augustine, the Sacramento day-care provider, became a first-time homeowner in November 2006 by taking out two loans with nothing down to cover the $426,000 home purchase. With her home valued at about $220,000 now, she is actively looking in nearby communities for another one to buy before the bank forecloses on her current home. The mortgage industry is starting to wise up to the practice and is scrambling to fight back. Buy-and-bail is “certainly fraudulent and unfortunately on an uptick,” says Gwen Muse-Evans, vice president for credit policy and controls at Fannie Mae. Although she doesn’t have data to quantify the size and scope of the trend, Ms. Muse-Evans says overwhelming anecdotal reports have prompted the agency to draft tougher regulations aimed at closing one big loophole that allows underwater homeowners to qualify for new home loans. That loophole currently works like this: Homeowners provide a rental agreement showing that they will rent out their first home, and underwriters allow rental income to cover as much as 75 percent of the mortgage payments on the first home when determining whether the borrower can make payments on two homes. This allows homeowners to secure a second mortgage that they might not otherwise afford.

Under revised Fannie Mae guidelines, which could take effect next week, loan applicants who claim they will rent out their first home will have to produce supporting evidence, including an executed lease agreement. Borrowers also will have to prove that they can pay the mortgage, property taxes and <a class=”iAs” style=”border-bottom: 0.075em solid darkgreen ! important; font-weight: normal ! important; font-size: 100% ! important; text-decoration: underline ! important; padding-bottom: 1px ! important; color: darkgreen ! important; background-color: transparent ! important;” for both residences. The guidelines will make an exception only for borrowers who have at least 30 percent equity in their current home. Of course, many individuals still can qualify for that second loan because of a strong credit and cash position. If they “have the intention of fraud, then at the end of the day there’s really little you can do to totally prevent that,” says Ms. Muse-Evans. Some private lenders aren’t waiting for Fannie’s lead. In April, underwriters handling bank-owned properties at IndyMac Bancorp Inc. told brokers they would require borrowers purchasing new homes while retaining their existing home as a rental to prove that they could make full payments on both homes to qualify for a loan. A memo sent to a Southern California broker said the policy change was prompted by “losses from individuals walking away from properties after the acquisition of a new home.” An IndyMac spokesman said the bank hadn’t changed its policies and had always “underwritten loans with an eye towards insuring that our borrowers could readily rent out their current property and/or reasonably support both payments.” Realtors say the new guidelines could put further pressure on sales, but Lawrence Yun, chief economist for the National Association of Realtors, says the impact of such guidelines on sales would be marginal. He calls Fannie Mae’s response appropriate because any artificial increase in home sales hurts the average consumer. Meanwhile, Mr. Hawks, the Las Vegas broker, says he receives one to two dozen inquiries every week from individuals inquiring about a buy-and-bail. “People are starting to ask how much their good credit is worth,” particularly when their home is underwater by hundreds of thousands of dollars.

The tactic doesn’t appeal to people such as John Ristuccia, a 48-year-old Buckeye, Ariz., paper-company sales director whose job was moved to Houston in August. He is trying to complete a “short sale” for $425,000 on his five-bedroom, 4,000-square-foot home, which was appraised for $800,000 last year. In a short sale, a lender allows the sale of property for less than the amount due on the outstanding loan and often forgives the remaining debt.

Even though he might be able to qualify for a second home loan, Mr. Ristuccia says he wouldn’t consider sticking his bank with his suburban Phoenix property. “Just personally I’ve got a problem with that,” he says. “I really can’t put it in terms other than it feels wrong.”