Tuesday, April 13, 2021

Before you pay cash for a home



Before you pay cash for a home, ask yourself if there is a possibility, at some point in the future, you might put a mortgage on the home and would want to deduct the mortgage interest on your federal tax return.

Current federal tax law allows homeowners to deduct the interest on up to $750,000 in acquisition debt used to buy, build or improve a property.  When a person pays cash for a home, the acquisition debt is zero.  The only way to increase the acquisition debt is to make and finance the improvements to the home.

As with many IRS regulations, there are exceptions to this rule.  If a mortgage is secured on the first or second home within 90 days of the purchase closing, the debt is considered acquisition debt.  The interest on the funds used to purchase the home can be deducted on up to $750,000 of the mortgage balance.

Assuming a borrower has good credit, the ability to repay the loan and the home justifies the loan, lenders are willing to make mortgages for homeowners.  It does not mean that the interest on the mortgage will be deductible.

Additional information can be found in Publication 936, Home Mortgage Interest Deduction, of the Internal Revenue Service at IRS.gov.

To deduct home mortgage interest, you must file Form 1040 or 1040-SR and itemize deductions on Schedule A.  The mortgage must be secured debt on a qualified home in which you have an ownership interest.  Interest on home equity loans is only deductible if the borrowed funds are used to buy, build or substantially improve the taxpayer's home that secures the loan.

If you answered yes or even maybe to the question first posed in this article, contact your tax professional to determine the best way to approach your individual situation.  For more information, download the Homeowners Tax Guide.

Tuesday, March 23, 2021

Homeowner Equity and Wealth Accumulation



National homeowner equity grew in the fourth quarter of 2020 by $1.5 Trillion or 16.2% year-over-year based on a CoreLogic analysis.  The study was done on the six out of ten homeowners who have mortgages on their home.

The fourth quarter of 2020 also saw the number of mortgaged residential homes with negative equity decrease by 8% from the third quarter.  Compared to the same quarter in 2019, negative equity decreased by 21%.

Equity is defined as the value of the home less the mortgage owed.  Negative equity means that the homeowner's debt is more than the value of the home.  Appreciation is the dynamic that is moving homeowner's equity to the positive position.

On a national basis, according to National Association of REALTORS®, annual price growth for the last ten years has been 6.4%.  In the last five years, it has grown at 7.3% annually.  According to the CoreLogic Home Price Index, home prices in December 2020 were up 9.2% from the year before.

Frank Nothaft, Chief Economist for CoreLogic, is quoted as saying "the amount of home equity for the average homeowner with a mortgage is more than $200,000."

Equity in a home is a significant component of net worth.  The latest Survey of Consumer Finances reports the median homeowner has 40 times the household wealth of a renter: $254,000 compared to $6,270.  According to the 2019 Survey of Consumer Finances by First American, housing wealth was the single biggest contributor to the increase in net worth across all income groups.

The study also concluded that housing wealth represented nearly 75% of total assets of the lowest income households.  For homeowners in the mid-range of income, it represented 50-65% of total assets and 34% of total assets for the highest income households.

Renters do not benefit from the appreciation of housing or the amortization of the mortgage which are significant contributors to home equity that results in net worth.  Examine what a down payment can grow to in seven years with a Rent vs. Own.

Tuesday, March 9, 2021

Skip the Starter Home



For generations, people have begun their homeowner experience with a "starter" home.  Part of the logic may be that by beginning with a smaller home, they can learn what it takes to run the home and discover some of the unexpected costs that come along with it.  A slightly longer view into the future could suggest a different strategy.

As of March 4, 2021, the average 30-year mortgage rate according to Freddie Mac was 3.02%; up .37% from the week of January 7th this year.  At the same time, in 2020, the rate was 3.29% and in 2019, it was 4.41%.  That is a difference of 28 and 139 basis points.

The principal and interest payment on a $300,000 mortgage would have been $236 higher two-years ago and $44 more one-year ago.  Today's low mortgage rates are saving buyers lots of interest especially when you factor in the median tenure for sellers is approximately ten years.  Even though prices have increased over the last two years, some people may be able to afford more now with the lower rates.

Anticipating the future wants and needs now may present some opportunities for preparing for the inevitable.  By purchasing a larger home today, a buyer can lock in today's low rates and prices to allow themselves room to grow without the expenses of moving.

Each time you sell and purchase a home, there are expenses associated with each side of the transaction.  Purchase costs could be 1.5 to 3% while sales expenses could easily be 2.5 times that much.  These expenses lower the value of your equity. 

Instead of looking at the low mortgage rates as generating a savings from the payment you might normally have to make, consider it an opportunity to purchase more home that will possibly meet your needs for a longer time while eliminating the cost of selling and purchasing in the transition.

Tuesday, March 2, 2021

Your Refund Could Open the Door



One of the silver linings to filing your income tax return is finding out that you are going to receive a refund that could literally open the door to owning a home.  If you happen to be one of these fortunate taxpayers, your next decision is what to do with it. 

With the average tax refund near $3,000, it could be the ticket to buying a home sooner rather than later.  Regardless of the size of your refund, it can be used toward the down payment or closing costs of the home.

Most people think it takes 10% or more down payment to purchase a home, but actually, it is much less because of several low down payment mortgages .  There are VA and USDA mortgages that allow for no down payment for qualified buyers.  FHA has a 3.5% down payment program and FNMA and Freddie Mac have 3% down payment mortgages for qualified creditors as well as 5% down programs.

Closing costs for originating new mortgages can easily range from two to three percent of the purchase price but most lenders will allow the seller to pay part or all of them based on the agreement in the sales contract.  If you are using a VA or USDA loan, your refund could go toward paying the closing costs.

On a practical matter, if you are due a refund, have it deposited directly into your account.  It is necessary to trace the source of the funds.  Cashing a refund check and depositing the cash adds an unnecessary aging requirement.

Maybe you have the money saved for your down payment and closing costs but you have other debt that is keeping you from qualifying for a mortgage.  The IRS refund could be used to pay down that debt.  However, you need solid advice from a trusted mortgage professional before you do that.

While the average tax refund might not cover the down payment on the median price home, it certainly helps.  Your refund could make it a simple as 1-2-3 to get into a home.

  1. Get the hard, cold facts for the homes and mortgages in your area and price range.
  2. Get pre-approved with a trusted mortgage professional.
  3. Start looking at homes.

Download the Buyers Guide and contact me at (703) 217-6447 or Bob@Military-RealEstate.comto get started.

Tuesday, February 23, 2021

Transferring Property Prior to Death



Sometimes, as people approach the inevitable, they start trying to get their things "in order".  They may even have a will, but they decide to transfer title to real estate prior to their death which could be an unnecessary expense for the would-be heir.

Generally, when property is passed through direction of a will, the heir will receive a stepped-up basis which means that the fair market value of the property at the time of death becomes the cost basis for the heir.  If the property were sold for that fair market value, there would be no gain and no capital gains tax due.

However, if the property is gifted prior to death of the donor, along with the title to the property comes the cost basis of the property.  The transfer of title does not trigger the capital gains tax but when the property is sold, the gain is calculated by subtracting the basis from the sales price leaving a capital gain subject to tax.  In other words, the person receiving the gift does not get the stepped-up basis.

There certainly can be advantages to transferring the property prior to death.  It completes the transfer without having to wait for the death and bypasses the probate process that might be required to settle the will.  Another advantage to the donor may be to remove the property from the owner's name which could lower the taxable estate. 

Some owners may transfer title prior to death to qualify for Medicaid.  The value of the asset may make them ineligible.  It may trigger a Medicaid Transfer Penalty when the gift is made within five years and the basis of the property is less than fair market value.

Once a property is deeded to someone, the donor loses control of the asset and it cannot be reversed.  Depending on the value of the estate, there could be gift or estate tax implications.  As mentioned earlier, it may have capital gain tax consequences for the donor when they dispose of the property.

If the person receiving the gift has creditors or judgements, the gift becomes an asset subject to those creditors or judgements.

Even though the mechanics of transferring title to a property is simple, there are many things to consider for both the person giving the property and the one receiving it.  Consult an attorney and tax professional to determine the best informed decision available.  There could be other alternatives that would better serve your situation.

Tuesday, February 16, 2021

Is It Time to Cancel the Mortgage Insurance?



Mortgage insurance benefits the lender if a borrower with less than a 20% down payment defaults on their loan.  Most conventional mortgages greater than 80% and all FHA loans require the borrower to have this coverage.

Private mortgage insurance on conventional loans can range from 0.5% to 2.25% based on the loan-to-value and the credit worthiness of the borrower.  A $350,000 mortgage would have a monthly mortgage insurance premium of $146 a month at the low-end of the scale and over $600 on the high-end.

You may request that your mortgage servicer cancel the PMI when the principal balance reaches 80% of the original value at the time the loan was made.  You should have received a PMI disclosure form when you signed the mortgage documents stating the date.  If you have made additional principal contributions, it will accelerate the date.

Other criteria considered to cancel the PMI on your loan is:

  • The request must be in writing.
  • You must be current on your payments with a good payment history.
  • The lender may ask that you certify there are no junior liens in effect.
  • If the lender is concerned that the value has declined, an appraisal may be required to show that it is eligible.

Conventional loans are supposed to remove the mortgage insurance when the unpaid balance is 78% of the original purchase price. 

Another possibility is that the lender/servicer must end the PMI the month after you reach the midpoint of your loan's amortization schedule.  For a 30-year loan, it would be after the 180th payment was paid.  The borrower must be current on the payments for the termination to occur.

With the rapid appreciation that many homes have enjoyed in recent years, homeowners may be able to refinance their home and if the new mortgage amount is less than 80% of the current appraised value, no mortgage insurance would be required.

The owner would incur the cost of refinancing but eliminate the cost of the mortgage insurance.  To calculate the savings, subtract the new principal and interest payment from the old principal and interest with PMI.  Then, divide the savings into the cost of refinancing to determine the number of months necessary to recapture the cost.

FHA loans have two types of mortgage insurance premium: up-front and monthly.  For loans with FHA case numbers assigned on or after June 3 2013 with LTV% greater than 90%, the MIP will be paid for the entire term of the loan.  If that is the case, refinancing on a conventional loan is the only way to eliminate the MIP.  For loans with original LTV% less than 90%, the MIP is collected for 11 years until the balance is 78% of the original amount.

When buying a home, purchasers may not have enough resources for a large down payment.  It is understandable to use the best mortgage available to buy the home.  The next goal should be to manage the mortgage to lower the overall costs.  In this article, we explored eliminating the private mortgage insurance.

Tuesday, February 9, 2021

Make Your Best Offer FIRST



This strategy is not about trying to negotiate the best price; it is about beating out the competition and buying the home.  It may be difficult to understand until you have lost a few homes to better offers but when the reality of the situation is that there are not that many homes on the market, the competition heats up and different tactics are necessary. 

Sales in December were annualized at 6.76 million, a 22.2% increase year over year according to the National Association of REALTOR®.  The median sales price is $309,800 which is up 12.9% from the previous year.  Inventory for December fell to 1.9 months' supply from 3.0 months' supply in December of 2019.  Six months inventory is considered a balanced market.

Things that work in a buyer's market will not work in a seller's market.  The shortage of available homes for sale has led to not only shorter market times but multiple offers that have sales prices above the listing price.  Buyers, especially in entry to mid-level priced ranges, may have lost out multiple times to buy a home. 

Buyers must be strategic if they want to successfully find a home.  There are some things that are absolutely essential to just be in the game.

Unless you are paying cash and have adequate proof of funds, you need to get pre-approved.  REALTORS® and financial advisors have been saying this for decades, but it is critical now.  There are plenty of reasons that benefit the buyer but most importantly, it is to show that a buyer is serious and has gone through the effort to have a lender run his credit and verify his income, expenses, employment, and credit.

If the home fresh on the market, in a desired location and price range, you need to assume there will be competing offers and you may never even get a counteroffer from the seller.  You need to consider making your highest and best offer first, as if you will not get a second chance.  This is more difficult for some people than others because of their bargaining nature.

Earnest money that accompanies a contract shows that the buyer is acting in good faith.  The amount that may be customary may not be enough in a competing market.  Consider two or three times what might be normal.  Talk to your agent about what would make an impression on the seller.

While contingencies will protect your earnest money from specific concerns like loan approval and inspections, the seller will look at them as ways that the buyer can get out of the contract and they'll need to put the home back on the market.  If a seller is presented multiple offers, they might be prone to accept one with the least contingencies, especially, if the prices are comparable.

There is usually a period connected to the different contingencies that are allowed to complete them.  By shortening these times as much as possible limits the time the seller might feel they are in limbo.

If you have the flexibility, you might express your willingness to move the closing and/or possession dates to accommodate the seller's schedule.  This could be an important factor in your favor and could be done in a verbal statement conveyed from your agent to the listing agent.

These are things buyers should consider and discuss with their agent before they find the home that they want to buy.  While you are formulating your position, another offer may be accepted before you even make yours.  For more information, download our Buyers Guide.