Verify with Your Lender

If you have a mortgage with an escrow account to pay your property taxes and insurance, you expect the company servicing your loan to pay this year’s taxes this year so that you can deduct them on your 2014 income tax return.  After all, your monthly payment includes 1/12 the annual amount so there will be money available for them to be paid on time.

IRS requires that expenses must actually be paid in the year that a deduction is to be taken.

The predicament occurs when you’ve made your payments but the mortgage company didn’t pay the taxing authority in the tax year they were due.  If they paid your 2014 taxes in January of 2015, they wouldn’t be deductible for you until you file your 2015 income tax return.

Verify with your lender after you make the December payment that they did indeed pay your property taxes.  The question for your lender’s customer service is: "Have you or will you pay the 2014 property taxes this year so I’m eligible to deduct them on my 2014 income tax return?”

Consider an Adjustable Rate

With fixed rate mortgages as low as they are, most purchasers or owners wanting to refinance might not even consider an adjustable rate loan.  The determining factor should be how long the person plans to be in the home and which mortgage will provide the cheapest cost of housing.

For instance, if you compare a $300,000, 30 year term mortgage with a 4.125% rate on the fixed and a 3.25% on the 5/1 adjustable, the breakeven point would be almost seven years assuming the rates adjusted the maximum that they could in each year.

 

Therefore, if a person is going to stay in the house less than 7 years, the ARM would provide the cheapest cost of housing.  This example shows that at the end of five years, the ARM would generate almost $13,000 savings over the fixed-rate. 

On the other hand, this could be a good time for homeowners with an existing adjustable rate mortgage to consider refinancing into a fixed-rate mortgage.  The longer that they intend to stay in their home, the more advantageous it might be for them to convert their mortgage to lock-in their payment and fix their housing costs.

A trusted mortgage professional can analyze the alternatives to provide you with the information necessary to make a good decision.  You can try the Adjustable Rate Comparison with your own numbers to see the effect.

Realize Tax Savings Sooner

A homeowner’s tax saving benefit is generally realized when they file their federal income tax return after the money has been spent for the interest and property taxes.  Some people look forward to the refund as a means of forced savings but some people need to realize the savings during the year.

It is possible to adjust the deductions being withheld from the homeowner’s salary so they realize the benefit of the savings prior to filing their tax returns in the form of more money in their pay checks.  Employees would talk to their employers about increasing their deductions stated on their W-4 form.

By increasing the exemptions or deductions, less is taken out of the check and the employee will receive more in each pay check.  If a person over-estimates their exemptions and therefore, underpays their income tax, they might incur interest and would have additional tax to pay when they filed their tax return.

Buyers considering this strategy should seek tax advice and discuss it with their human relations department at work.   Additional information is available on the Internal Revenue Service website about Completing Form w-4 and Worksheets.

Talking Points with an Agent

A list of talking points can be very valuable to guide the conversation with an agent that will lead to a decision to have him or her represent you in the sale of your home.  If you haven’t been through the process before or it has been a while, the answers to these questions can reveal things about the experience and where-with-all of your candidate.

Even if you only intend to interview one agent and maybe they are a trusted friend, it is appropriate to understand how different issues will be handled.  Professionals should not feel challenged to discuss these important concerns.

1. Tell me about your experience and training.

2. Do you work real estate full-time?

3. Are you a REALTOR® and a member of MLS?

4. What is the average price of the homes you have sold and how many did you sell last year?

5. Which neighborhoods do you primarily work?

6. How many homes have you sold in my neighborhood?

7. What is your list price to sales price ratio?

8. How many buyers and sellers are you currently working with?

9. Tell me about the positives and negatives of my home?

10. Describe your marketing plan for my home and if you will use outside professionals.

11. Specifically address Internet exposure, open houses and showings.

12. Describe how you’ll keep me informed all along the way.

13. Will I work directly with you or with team members?

14. Can you provide me with three recent references?

You might have noticed that price was not in the list of talking points.  The seller sets the price but the market and the buyer determine the value.  The agent can advise you about the proper range that will insure activity and ultimately affect your final proceeds.  The advice should be based on facts that are available to all agents as well as the prospective buyers and the appraisers.

The decision to list a home with a particular agent and company should never be based on the listing price suggested by the prospective agent.

Relax...There's an Alternative

Is the stock market keeping you up at night?  Are you consuming more antacids than ever before?  Are the ups and downs causing more stress than you want or need?  There is a simple alternative in rental real estate.

Single family homes for rental purposes offer an excellent rate of return in an investment that most people understand better than other investments.  The concept is simple: stay with predominantly owner-occupied homes in a slightly below average price range.  In most areas, tenants are easy to find and they’ll usually stay two to three years or more.

For the person who doesn’t want to be bothered with calls from tenants, professional management is available and commonly won’t dramatically affect the rate of return.  Managers can achieve economies of scale that individuals can’t due to managing multiple properties and having good connections with the best workmen.

Unlike most commercial property, single family homes are much more liquid because of the higher demand for residential property.  Single family homes offer the investor the opportunity to borrow high loan-to-value mortgages at fixed interest rates, for long periods of time on appreciating assets with tax advantages while providing the investor a higher than normal level of control.

Spend an hour investigating the benefits and you might sleep better at night, eat less antacids and find yourself more mellow than you’ve been in years.

Save Interest, Build Equity & Shorten the Term

If you invest in a savings account, you’ll make less than 1% and would have to pay income tax on the earnings. On the other hand, contribute something extra to your house payment and you’ll earn at the mortgage interest rate which is certain to be more than you are earning in the bank.

Making additional principal contributions on your mortgage will save interest, build equity and shorten the term. An extra $100 a month in the example shown will save thousands in interest and shorten the term of the mortgage as well.

Reducing your cost of housing is another way to improve the investment in your home. Becoming debt free is a worthy goal that is achieved with discipline and good decisions. Suggestions like this are part of my commitment to help people be better homeowners when they buy, sell and all the years in between.

Check out what would happen if you were to make additional payments on your mortgage.

Enjoy Your Improvements and Profit by Them

Homeowners can raise the basis or cost in their home by money spent on capital improvements. The benefit is that it will lower their gain and may save them taxes when they sell their home.

Improvements must add value to your home, prolong its useful life or adapt it to new uses. Repairs are routine in nature to maintain the value and keep the property in an ordinary, operating condition.

Additions of decks, pools, fences and landscaping add value to a home as well as new floor covering, counter-tops and other updates. Replacing a roof, appliances or heating and cooling systems would be considered to extend the useful life of the home. Completing an unfinished basement or converting a garage to living space are common examples of adapting a portion of the home to a new use.

Other items that can raise the basis in your home are special assessments for local improvements like sidewalks or curbs and money spent to restore damage from casualty losses not covered by insurance.

Here’s a simple idea that could save you money years from now.

Every time you spend money on your home other than the house payment and the utilities, put the receipt or canceled check in an envelope labeled “Home Improvements.” Regardless of whether you know if the money would be classified as maintenance or improvements, the receipt or cancelled check goes in the envelope.

Years from now, when you’ve sold your home and you need to report the gain on the property, you or your accountant can go through the envelope and determine which of the expenditures will be adjustments to your basis.

Some people disregard this idea because of the generous exclusion allowed on principal residences. At the unknown point in the future when you sell your home, circumstances may have changed and the proof of these expenditures will be valuable. The tax laws could lower the exclusion amount or eliminate it altogether. Your marital status may change because of death or divorce. The market value of your home may skyrocket.

Since the future is unknown, it is better to keep track of the improvements as they are made and how much is spent on them. Download an Improvement Register and examples or read more in Publication 523 on Increases to Basis.

Opportunity Costs

Sometimes, there are costs associated with not taking a particular action.  If a person left their money in a certificate of deposit earning 2% when they could have made an investment that earned 8%, the difference is the opportunity costs associated to not taking action.

If a couple has a down payment and good credit, locking in a low interest rate mortgage for 30 years could easily provide their lowest cost of housing.  If that couple waits three years to purchase a home, the price would probably be higher as would the mortgage rate.

However, assuming the price and interest rate remained constant, look at what the opportunity costs might be compared to doing nothing.

If their money was invested in a certificate of deposit at 2.00%, in two years their $8,750 would have grown to $9,104.  They would have earned $354 and had to pay ordinary income tax on the interest.

If their money was invested in the stock market that had increased 7%, in two years they would have a profit of $1,268 which would be subject to long-term capital gains tax.

On the other hand, it the same investment was used to buy a home that increased in value at 3% annually, the equity would be $31,938 or an increase of $23,188. Tax would not be triggered until the home is sold and may not be due then based on their homeowner’s principal residence exclusion.

The home goes up in value due to appreciation and the unpaid balance goes down because of amortization.  The dramatic difference in growth in the equity of the home is effected by leverage: the use of borrowed funds controlling the asset.

A home is a place of your own where you can feel safe and secure, to enjoy with your family and friends and in many instances, a very good investment.  It is difficult to measure the opportunity costs of intangibles but not necessarily money.

Make your own projections with Your Best Investment.

 

Crafting an Accecptable Offer

An agent was presenting a contract to a single, senior woman who was moving into a retirement home.  It was a full price offer with reasonable terms and timelines but the seller wouldn’t accept it.  When the agent probed deeper, she discovered that the seller was concerned with her dining room table.

It had been the first piece of nice furniture that she and her husband had purchased and they had literally spent a lifetime celebrating and making decisions at that table.  It troubled the owner to think that the table would go to strangers who might not appreciate it as much as her family had.

The agent told the elderly seller that she knew of a church nearby that had a community room filled with lovely tables like hers.  If she liked the idea, the agent would call the church to see if they’d like to have it.  Once a new home for the table was found, the sale of the home went smoothly.

Lower inventory and increased demand in certain price ranges have increased the frequency of multiple offers on the same home.  Sellers are frequently faced with a decision dilemma on which offer to accept and the price may not be the most important factor.

Sellers generally need the equity from the sale of their home to purchase another one but they also don’t want to have to temporarily move if they’re not able to get into the home they’re purchasing.  Flexible buyers have discovered the value in coordinating the sale and possession of the homes.

Sellers want to know when they make a decision on an offer, that the buyers will be able to perform as the contract is written.  The more contingencies that can be eliminated or minimized, the more comfortable a seller will feel about the certainty that it will close according to schedule.

The buyer should be pre-approved with all verifications and credit reports having been done.  Simply having a loan officer’s opinion is definitely not the same thing as a pre-approval.

There is a unique dynamic to every transaction because the parties are individuals with infinite priorities and values.  The art of the deal takes place when these unique variables are considered to define a mutually acceptable offer involving price, terms and conditions. The role and experience of the agents contribute to the successful outcome.

Cash Flow and Equity Build-up

Many years ago, Las Vegas hotels would entice customers with inexpensive rooms, meals and entertainment so they would gamble.  It may have worked initially but if you’ve been to Las Vegas recently, the bargains are gone.  Hotels expect each division to be a profit center on its own.  As a consumer, I might not like the changes but as an investor, I’d have to be pleased with increased profitability.

Years ago, real estate investors used to accept negative cash flow buoyed by tax incentives in hopes of making a big payday due to appreciation when they sold it.   Today’s investors are focusing on tangible, current results like cash flow and equity build-up.

Cash flow is the amount of money you have left over after collecting the rent and paying the expenses.  Since rents have gone up considerably due to supply and demand in the last few years and mortgage rates are at near record lows, income is up and expenses are down, making the cash flows attractive.

If the cash flow is sufficient, you could have a good investment even if the value of the property never increased.  Cash on Cash doesn’t consider appreciation and measures the cash flow before tax advantages by the initial investment.  A rental with $3,170 CFBT divided by an initial investment of $29,000 would generate a 10.93% Cash on Cash rate of return.

Low down payments on investor properties are also a thing of the past.  Non-owner occupied mortgage money is available but the investor should expect to put down 25-30%. An advantage of having a smaller mortgage is a lower payment.

Most mortgages are amortized loans with both principal and interest due with each payment.  The forced savings of the principal contribution builds equity in the property and can be considered a part of the rate of return.

A $100,000 mortgage at 4.5% for 30 years would have $1,613.29 applied to principal in the first year.  Divide that by the same $29,000 initial investment and the amortization would generate another 6%.

Without factoring in appreciation or tax advantages, this rental example generates much more than most alternative investments.  There certainly are many different aspects that affect the risk and return on rental investments.  If you haven’t scrutinized single-family rental opportunities in a while, you should look again.

Which Filter to Use?

A dirty air filter decreases the effectiveness of your HVAC system because it inhibits airflow and allows dirt, dust, pollen and other materials to blow through the system.

The challenge is how often it should be changed to keep the system working efficiently and extend the equipment life. Too often and you’re wasting money and not often enough and your increasing the operating and maintenance costs.

Fiberglass panel filters are inexpensive and easy to find but they’re not very efficient and they allow most dust to pass through. They were popular years ago but there are much better products available currently.

Pleated air filters are available in MERV ratings from 5 to 12. As these filters collect dirt and other particles, they become less efficient to the point of impacting air flow. Allergy sufferers can benefit from this type of filter. These should be changed every two to three months based on local conditions.

HEPA filters stand for High Efficiency Particulate Arrestance. They are very efficient and more expensive than previously described filters. Since they are very efficient, they require changing more frequently; possibly, every month.

Electrostatic air filters are permanent and washable. They generally cost more initially but the savings will be based on how long they last. This type does not add to landfill issues or produce ozone.

Improperly maintained filters will lower the quality of the air in the home, have a negative impact on air flow, cause it to use more electricity and eventually require maintenance to the systems.

In an attempt to easily comparing filters, a rating system was created called MERV, an acronym for Minimum Efficiency Reporting Value. The rating from 1 to 16 indicates the efficiency of a filter based on standards set by ASHRAE. Higher ratings indicate a greater percentage of particles are being captured in the filter.

To create a system to remind you when to change your filters, set a reminder on your electronic calendar to recur for whatever frequency you determine is best for you. Be sure to keep a supply of filters on hand to be ready to change them out when the time comes.

The Reason They're Called Benefits

The Veterans Administration guarantees home loans for eligible veterans.  It is considered an attractive loan because the veteran can purchase the home with no down payment up to specific loan limits and no mortgage insurance. This makes the monthly payment considerably lower.

Let’s assume a buyer wants to purchase a $200,000 home and can get a 4.5% interest mortgage for 30 years.

A FHA loan would require a $7,000 down payment plus $3,377.50 in up-front MIP which can be rolled into the mortgage. The monthly mortgage insurance premium would be $221 per month for a total payment of $1,215.94.

The VA loan doesn’t require a down payment. There is a 2.15% VA funding fee that can be rolled into the mortgage which would make the principal and interest payment on $204,300 much less at $1,035.16.

The revised loan limits for 2014 are published by VA and can change each year especially based on high-cost areas. However, a lender can allow a home purchase in excess of these amounts with a 25% down payment on the amount above the limit.

If a purchaser wants to buy a $600,000 home in an area where the VA limit is $417,000, the lender could require a $45,750 down payment and make a $554,250 mortgage. In this example, the purchaser is able to get in for less than 10% down payment and no mortgage insurance.

Veterans with the available funds for a down payment should compare all loan products to consider which will provide the lowest cost of housing. A skilled real estate professional and a trusted mortgage advisor can be valuable resources.

Indecision Costs

More money has been lost to indecision than was ever lost to making the wrong decision.  The economy and the housing market have caused some people to take a “wait and see” position that could cost them in lost opportunities as well as almost certain higher costs in the future.

To illustrate what the opportunity cost might be, let’s compare what the value of the down payment two years from now would be if it was invested in a certificate of deposit, the stock market or used to purchase a home today.

A 3.5% down payment on a $175,000 home is $6,125.00.  If it was invested in a CD that would earn 2%, a person would have $6,372 in two years.  The earnings would be taxed as ordinary income tax rates.  It wouldn't earn much but it would be safe and secure.

The same amount would grow to $7,013 in the stock market if you picked the right stock or fund and it yielded 7%. The earnings would be taxed at the long term capital gains rate.  The return could be greater but so is the risk involved.

If this person were to purchase a home today that appreciated 2% in value over the next two years, the equity in the home would grow to $18,769 due to value going up and the unpaid balance going down.

 

 

 

 

 

 

 

 

The question, we all must ask ourselves is “where should our money be invested?”  Try Your Best Investment to see the difference it will make based on your price range, down payment and earning rate.

Every Renter Should Know

The first home purchase can be the culmination of years of planning and consideration. Buyers typically look for 12 weeks and use a variety of information sources for research before purchasing. However, many renters are not near as thorough in their study.

Like any other commitment a person makes, careful consideration and understanding is required. There are things that every renter should know before they rent a home or apartment.

1. A lease is a binding, legal document.
2. Understand the lease before signing and ask questions.
3. Get the complete agreement in writing instead of verbal statements.
4. Tenants have rights too and they vary depending on the state and city.
5. Tenants need renter’s insurance for their personal belongings and liability.
6. The landlord is responsible for a habitable and safe environment and should typically pay for repairs due to normal wear and tear.
7. Do a walk-through of the property before signing a lease.
8. Don’t withhold the rent to settle a disagreement with landlord.
9. The landlord must return your deposit or tell you why it is being held in a reasonable time.
10. It may cost you considerably less to own the home than to rent.

With the exceptionally low mortgage rates available, the house payment including taxes and insurance can easily be less than the market rent of a home. By the time you factor in appreciation, forced savings due to amortization, leverage and tax savings, the actual cost of housing could be close to half of the rent even if a reasonable repair allowance is factored. Check out your net cost of housing.

Fifteen Will Get You Three

Freddie Mac chief economist, Frank Nothaft, says that affordability, stability and flexibility are the three reasons homebuyers overwhelmingly choose a 30 year term.  However, for those who can afford a higher payment, there are three additional reasons to choose a 15 year term: save interest, build equity and retire the debt sooner.

First-time buyers have a higher tendency to use a minimum down payment and are very concerned with affordable payments.  It is understandable that the majority of these buyers select 30 year, fixed-rate mortgages.

Consider a $200,000 mortgage at 30 year and 15 year terms with recent mortgage rates at 4.2% and 3.31% respectively. The payment is $433.15 less on the 30 year term but the interest rate being charged is higher.  The total interest paid by the borrower if each of the loans was retired would be almost three times more for the 30 year term.

Another interesting thing about the 15 years mortgage is that more of the payment is going to principal than interest from the very first payment.  It would take over 13 years on the 30 year mortgage for the principal to exceed the interest allocation.

Some people might suggest getting a 30 year loan and making the payments as if they were on a 15 year loan.  That would certainly accelerate amortization and save interest. The real challenge is the discipline to actually make the payments on a consistent basis if you don’t have to.  Many experts cite that one of the benefits of homeownership is a forced savings that occurs due to the amortization that is not necessarily done by renters.

Make Good Offers Better

It’s disappointing, frustrating and sometimes, discouraging when you lose a home you want to buy.

One of the hardest lessons for today’s buyers is that writing an offer doesn’t mean that you’ll get the home or even a counter-offer.  The low inventory affecting many of the housing markets requires a different strategy to give you the best chance to get the home you want.

1. Make your best offer initially; you may not get a chance to accept a counter.
2. Submit a written pre-approval letter from the lender.
3. Increase earnest money above what is considered normal.
4. Make a larger down payment.
5. Eliminate unnecessary contingencies.
6. Don’t ask for personal property not included in the listing agreement.
7. Pay your own customary closing costs.
8. Shorten the inspection period.
9. Buy the home “as is” subject to inspections which still allows you to get your earnest money back if the inspections are unacceptable but doesn’t require the seller to make repairs.
10. Write the seller a hand-written, personal letter telling them why you want their home; include a picture of your family.
11. Offer to use the seller’s or listing agent’s preferred title company.
12. If you can pay cash, do so and arrange financing after closing.  Be prepared to show proof of available funds.
13. Schedule the closing as soon as possible but let the seller know you can be flexible.
14. Once you decide on a home, act with expedience.
15. Ask your real estate professional if they have any other suggestions. 

 Think of making an offer like applying for a job. You want to make your best impression and show why you are the best choice.  You won’t always know that there are multiple offers.  Approach the process like the competition is doing their best to get the home.

An Unexpected Expense

In a study released by TD Bank, 65% of buyers with mortgages that required mortgage insurance said the higher monthly payment was more than they originally expected.

Private mortgage insurance is required on loans that exceed 80% of the home’s value.  For conventional loans, the premiums range from 0.5% to 1% annually.  The PMI could add close to $100.00 a month to the payments on a $200,000 mortgage and over $200.00 a month on a FHA mortgage.

FHA has two components to its mortgage insurance which includes an up-front charge on closing of the loan and an annual charge.  The up-front premium is 1.75% of the mortgage which can be paid in cash at closing or added to the mortgage amount.  The annual premium ranges from 0.45% to 1.35% depending on the loan-to-value and term of the mortgage.

Most lenders are required to automatically cancel coverage when a 78% loan-to-value is reached which on a 30 year loan with normal amortization could be eight to eleven years depending on original loan amount and interest rate.   If the value of the home has increased as documented by an appraisal so that the current mortgage is below 80% loan-to-value, the lender can be petitioned to eliminate the PMI.

Beginning in April, 2013, FHA requires the mortgage insurance to be paid for the entire term of the mortgage.   Prior to this rule change, it was required to remain in effect for a minimum of five years but could be cancelled when the mortgage is reduced to 78% of the original purchase price.

A homeowner can greatly reduce their cost of housing by avoiding mortgage insurance with a minimum 20% down payment.  If a higher loan-to-value mortgage is required to purchase the home, the objective should be to pay down the mortgage amount to relieve the need for the mortgage insurance.   Generally, loans with lower loan-to-value mortgages also have lower interest rates.

What is a Seller's Market?

It is generally considered a seller’s market when the conditions favor the seller.  This condition exists when demand is high and supply is low without any significant adverse economic conditions taking place.

Demand is determined by ready, willing and able buyers.  Low interest rates with indications that they will begin to rise fuels part of this demand. Rising prices also creates a sense of urgency to avoid higher housing costs.

Inventory is currently below what is considered balanced in most areas. In some areas and price ranges, homes are selling very quickly, with multiple offers and sometimes at above the listing price.  When too many buyers are chasing too few properties, things get competitive and the seller is the beneficiary.

Even when buyers and sellers come to an agreement on price and terms, a challenge can occur if the appraisal doesn’t meet the sales price.  Either the purchaser has to come up with the additional cash or the purchase price has to be renegotiated.

A typical seller wants the most money possible for their home in the shortest time frame with the fewest inconveniences.  A Seller’s Market provides the most likely environment for this to happen.

Don't Leave Home Without...

Planning a summer trip is usually focused on what you’ll do, see and experience.  Enjoy it even more by spending a little time before you leave to make sure your home is safe while you're gone.

Consider these suggestions along with your other normal efforts:

• Tell your neighbors you’ll be out of town and to be aware of any unusual activity.
• Notify your alarm company .
• Discontinue your postal delivery.
• Use timers on interior lights to make it appear you’re home as usual.
• Don’t make it easy for burglars by leaving messages on voice mail or posting on social networks.
• Post on social networks about your vacation after you’ve returned.
• Remove the hidden spare keys and give one to a trusted neighbor or friend.
• Lock everything, double-check and set the alarm.
• Take pictures of your belongings in case you need them.
• Disconnect TVs and other equipment in case of unexpected power surges.
• Adjust your thermostat.
• Arrange for lawn care.
• Consider disconnecting the garage door opener.
• Put irreplaceable valuables in a safety deposit box.

 It’s nice to go out of town on a well-deserved trip and it’s always nice to get back home…especially when it is just the way you left it.

Cut Your Housing Costs in Half

Serious shoppers wait for a 50% off sale to make the decision because of the bargain factor.  Renters who are serious about lowering their monthly cost of housing should consider buying with today’s low mortgage rates.  For an example, let’s assume a person buys a $200,000 home with 3.5% down payment on a 4.5% FHA mortgage for 30 years.

The total house payment would be approximately $1,508 per month.  However, once you consider the equity build-up due to normal amortization, a monthly appreciation estimated at 2% annually for this example, the tax savings and paying maintenance that a tenant wouldn’t be required to do, the net cost of housing is $772 a month.  This is almost half of the full mortgage payment.

If this person was paying $1,750 a month for rent, it would cost him almost $978 more to rent than to own. In the first year alone, it would accumulate to over $11,000 which is more than the down payment required of $7,000.

Owning a home is the largest investment that most people make and the down payment of $7,000 to purchase this home would grow to $58,837 in equity by estimating a 2% appreciation and normal amortization.

To check out what your real housing costs might look like, go to Rent vs. Own or contact your real estate professional.