Eight Ways to Cut Back Without Sacrificing

by Kimberly Palmer
Friday, February 1, 2008provided by

When times are tight—as they are now for many Americans facing declining home values, depressed stocks, and tighter credit markets—cutting back on indulgences can seem inevitable. But it might not be. U.S. News asked budgeting experts for advice on how to make ends meet during tough times without sacrificing too many of life's pleasures. Here are their top tips.

Take bubble baths. If soaking in hot water doesn't cheer you up, find out what does, because it could stop you from wasteful splurges after a bad day. "Especially in times like these, it's very important for people...to find other ways [than shopping] to make themselves feel better, whether it's tantric methods, meditation, Chinese balls, or bubble baths—just do what will not break the bank," says Ken McDonnell, program director at the American Savings Education Council.

Host movie night. Going to the movies, especially if you're a popcorn fan, can easily cost $40 for two people. Instead, suggests Faye Griffiths-Smith, community leader for the American Association of Family and Consumer Sciences, rent a movie and invite friends over to watch.

Learn to cook. Not only does eating at restaurants add up, but so too does buying lunch. If you cook dinner at home, you can bring in leftovers to work the next day or take a few minutes to pack a sandwich. If mornings are always rushed, then try packing it at night before bed, suggests Jean Austin, family and consumer science educator for the Maryland Cooperative Extension Service. And when you shop for your ingredients, make sure you have a snack first. Going to the grocery store hungry often leads to impulse buys, Austin warns.

Use the library. Your taxes are paying for it, so take advantage of the free books and movies. Austin says that even her small library in Maryland's rural Kent County offers DVDs, audio books, and free Internet service.

Drink at home. Whether your beverage of choice is green tea, espresso, or beer, it's much cheaper when consumed in the comfort of your own kitchen. Going to a bar with friends can easily cost $50, McDonnell says. Instead, pick up a six-pack and hang out at a friend's house. The social interaction will cheer you up without the hefty bar tab.

Use your savings. If you squirreled away three to six months of emergency savings in advance of being forced to tighten your budget due to a job loss or other unfortunate event, now is the time to use it. "Everybody should be contributing to their own emergency savings fund where it's earning interest," says Austin, so when times are tight, the money can go toward monthly bills and even some small indulgences.

Decide what you really want. Most people can cut 10 percent of their spending within 10 minutes, says Ramit Sethi, author of the I Will Teach You to Be Rich blog. Just write down your major spending categories, such as food and loan payments, and then guess what percentage is going to each category. Make a second list with what you want the percentages to be, and then make a third list describing what they actually are. If the reality doesn't match up with your ideal, then adjust your spending.

Dress in layers. Turning your thermostat down a few degrees and wearing a sweatshirt to stay warm can save on monthly heating costs, says McDonnell, which adds up over time. Just don't skimp on your monthly mortgage or rent payment, or if you need to adjust the payment schedule, contact your lender. Keeping your home should be a top priority.

NEW YORK (CNNMoney.com) -- The Senate on Saturday passed a $300 billion housing rescue bill aimed at helping troubled homeowners avoid foreclosure and supporting mortgage giants Fannie Mae and Freddie Mac.

President Bush is likely to sign the bill into law within days. After the law kicks in on Oct. 1, thousands of at-risk borrowers will be able to refinance their unaffordable old mortgages into new low-cost fixed-rate loans insured by the Federal Housing Administration (FHA).

The Congressional Budget Office estimates that 400,000 borrowers with $68 billion in loans may benefit from the program - but the bill allows for as many as 1 million or 2 million borrowers to participate in the program.

Here's what homeowners need to know.

More Information

· Who voted, and how they voted

· Full text of H.R. 3221 (.pdf)

· CBO: Cost of the bill (.pdf)

· Foreclosures by county

· House approves housing bill

· President Bush says he'll sign housing bill

Qualified borrowers must live in their homes and have loans that were issued between January 2005 and June 2007. Additionally, they must be spending at least 31 percent of their gross monthly income on mortgage debt to be eligible for the program.

They can be up to date on their existing mortgage or in default, but either way borrowers must prove that they will not be able to keep paying their existing mortgage - and attest that they are not deliberately defaulting just to obtain lower payments.

Before homeowners can get FHA-backed mortgages, they must first retire any other debt on the home, such as a home equity loan or line of credit. Borrowers are not permitted to take out another home equity loan for at least five years, unless it's to pay for necessary upkeep on the home.

To get a new home equity loan, borrowers will need approval from the FHA, and total debt cannot exceed 95 percent of the home's appraised value at the time.

Borrowers can contact their current mortgage servicer or go directly to an FHA-approved lender for help. These lenders can be found on the Web site of the Department of Housing and Urban Development.

This is a voluntary program, so lenders holding the original mortgage have to agree to rework a given loan before things can get started. The bill requires lenders to make major concessions, writing down the value of the loan to 90 percent of the home's current value. In areas where prices have plummeted by as much as 20 percent, that will mean a substantial loss for the lender.

But lenders won't sign off on a workout unless they think that they'll lose less money on that than they would by allowing a home to go through the costly foreclosure process.

Each loan will have to be underwritten by an FHA lender on a case-by-case basis. That means the banks will do a new appraisal to determine the home's current value, as well as examine and verify income statements, bank accounts, job histories and credit scores.

Based on that new appraised home value, the FHA lender must determine how much the original lender has to reduce the original mortgage, so that it will reflect 90 percent of the home's market value.

If the original lender agrees to the writedown, the new lender buys the old loan and takes over the reworked mortgage.

As part of the deal, the old lender writes off any fees and penalties on the original mortgage, including prepayment penalties, and accepts the proceeds from the new loan on a paid-in-full basis. Additionally, it pays the FHA an up-front premium equal to 3 percent of the mortgage principal.

There should be little up-front costs for borrowers to bear. Loan origination fees will vary by lender, but these can usually be paid by the borrower over the life of the loan in the form of a slightly higher interest rate.

However, the refinanced loans do come with many strings. For one thing, borrowers are responsible for paying an insurance premium to the FHA guaranteeing the loan, which will be 1.5 percent of the principal annually.

Borrowers also agree to share any profits from future home-price appreciation with the FHA. To do that, they'll pay a "3 percent exit fee" of the mortgage principal to the FHA when they resell or refinance.

Plus, they'll agree to pay the FHA 100 percent of any profits they realize from higher home prices if they sell or refinance within a year. So if the original loan principal is $200,000 and the home sells for $250,000, the borrower will owe the FHA $50,000, minus costs.

After a year, borrowers will share 90 percent of the profits with the FHA. The percentage keeps dropping in 10 percent increments to 50 percent after the fifth year, where it stays.

Savings depend on what borrowers are paying for their present loan and where they live, but for most people it will be substantial, even after factoring in the FHA fees.

In areas that have sustained huge price drops, such as Sacramento, Calif., where prices have fallen by about 30 percent over the past year, some loans might be reduced by more than 40 percent.

Additionally, the FHA loans carry reasonable interest rates, which are fixed for the life of the loan, as opposed to a subprime adjustable-rate mortgage that can jump higher every six months.