Downsizing Might Make Sense

With roughly 12.5% of the population over 65 years of age, it is understandable that some of them are thinking of downsizing because they may not need the amount of space they did in the past.  There is something to be said for the freedom acquired by divesting yourself of “things” that have been accumulated over the years but are no longer needed.

Moving to a less expensive home, could provide cash that could be invested for additional income or savings for unanticipated expenditures.

Savings can also be recognized in the lower utility costs associated with a smaller home, not to mention, the lower premiums for insurance and property taxes.

Going from the home where you reared your family to one of the new tiny homes may be a bit extreme but downsizing to 2/3 or 50% of your current home may certainly be reasonable.  In some situations, your interests may have changed so that a different area or city might be a possibility.

At one time, IRS had a once-in-a-lifetime exclusion of $125,000 of gain from a principal residence but it was changed so that homeowner’s are eligible for an exclusion of $250,000 of gain for single taxpayers and up to $500,000 for married taxpayers who have owned and used their home two out of the last five years and haven’t taken the exclusion in the previous 24 months.

Homeowners should consult their tax professionals to see how this may apply to their individual situation.

Reducing Interest Expense

0% financing has induced car buyers into taking the plunge because it doesn’t cost anything to use someone else’s money.  While mortgage rates are not at zero, they’re close enough that many buyers are applying similar logic.

Qualified mortgage interest is deductible on taxpayers' returns subject to the maximum acquisition debt of one million dollars.  For the fortunate homeowners who have paid off their mortgage, their acquisition debt was reduced to zero and only the interest on a maximum home equity debt of $100,000 is deductible.

If you have to pay interest, deductible interest is preferable because it reduces your actual cost.

Consider the following example of a taxpayer with a $500,000 debt-free home.  If they did an 80% cash-out refinance of $400,000, $100,000 would be considered home equity debt and the interest on that would be deductible on their income tax.  The other $300,000 of debt is considered personal debt and the interest is not deductible.

However, because the rates are currently so low, the loss of deductibility of the interest doesn’t have as much impact as if the rates were higher.  The key is to have a good purpose for the money that would offset the actual cost of the interest.

Paying off a higher rate debt such as credit cards, student loans, possibly, business debt could all have significantly higher interest rates.  Refinancing a home and eliminating debts like these could be a big savings.

All lenders are not the same.  Call for a recommendation of a trusted mortgage professional.

Homeowner Tax Benefits

There are many reasons for wanting to have a home of your own like a place to raise your family, share with friends and feel safe and secure.  While investment opportunities rank high for most people based on the fact that homeowners’ net worth is over forty times higher than that of renters, so do the tax benefits that reduce tax liability.

• Taxpayers who have owned and used a home for at least two out of the last five years, can exclude a maximum of $250,000 of gain as a single taxpayer and up to $500,000 of gain for married taxpayers filing jointly.
• If the gain on a principal residence exceeds the allowed exclusion, the balance is taxed at the lower long-term capital gains rate rather than the marginal tax rate of the homeowner.
• Homeowners can deduct the interest paid on up to $1,000,000 of acquisition debt used to buy, build or improve their first or second home.  They may also deduct the interest on up to $100,000 over acquisition debt that is a recorded lien on their first or second home.
• IRS will allow taxpayers to decide each year whether to take the higher of the itemized deductions or the standard deduction.
• Points paid on new loans for home purchases are considered interest and can be deducted in the year paid. On the other hand, points paid for refinancing a home must be amortized over the life of the mortgage.

For more information, talk to your tax professional and see IRS publication 523 and IRS Publication 936.

ICE Can Save Lives

Everyone knows that ice can make a drink cool or reduce swelling, but if you put it on your cell phone, it might just save your life.

The concept is simple.  Make a contact record in your address book with the name “ICE”, which stands for In Case of Emergency.  In the note section of the record, you would list your name, blood type and medical conditions along with prescriptions and physicians.  You’d also list the people and their phone numbers that can be contacted in case of an emergency.

Several years ago, a British first responder came up with the idea when his emergency unit responded to a call where the victim was unable to communicate due to illness or trauma.  The victim’s wallet didn’t indicate specific persons to be notified in an emergency.  The fireman went through his cell phone to try to identify a relative and wasn’t successful.

That’s when he came up with the idea of a universal entry into the address book for ICE where the necessary parties and special information could be kept.  The story received a considerable amount of publicity and spread across the pond to the United States and into many other countries.

While it isn’t recognized everywhere, it is becoming increasingly more popular.  Even if emergency technicians didn’t find it, the slight possibility that they would find it and it would make a difference would justify the few minutes it will take to create it.  Click here to download a card to carry in your wallet or purse.

Being a Good Neighbor

A good neighbor might be characterized as someone who’ll look after your home when you’re out of town by picking up your mail and watering your plants.  You’d most likely reciprocate for anyone who’d be so generous toward you.

In some cases, you might only be able to name one or two of your neighbors who would step up to that level of service.   Wouldn’t it be nice if more people on your street would be happy to make that offer?

The solution may just start with being a better neighbor first.  The following suggestions go a long way to improving your neighborhood and making new friends at the same time.

• Meet your neighbors and exchange phone numbers and email addresses.  Agree with each other that you’ll let them know if you see something strange going on at their home. 
• Slow down when driving through the neighborhood; it will make it safer and everyone will appreciate it. 
• Control your dog: keep it on a leash; pick up after it; don’t let it bark too much.
• Don’t park in front of your neighbor’s home.
• Notify your immediate neighbors when you’re having remodeling done and ask them to let you know if any of the contractors cause damage to their property.
• Let your neighbors know when you’re having a party and that there will be more cars on the street than usual.
• Maintain your home and yard so that it adds to the beauty of the neighborhood.
• Put your garbage out for collection on the correct day and bring the containers back in promptly.

In reality, it is fairly obvious; you just have to think of the things that you’d want from your neighbors.  Be friendly; don’t be noisy; offer a helping hand when available and respect each other’s boundaries.  Having a sense of community and that you all share the neighborhood can be underlying principles that will guide your behavior.

A good neighbor would be aware of suspicious activity and would call their neighbors and the police if warranted.  This might be something you can discuss with your neighbors.  Click here for a template to record your immediate neighbor’s contact information and keep readily available if needed.

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.

How's Your Memory?

How old is your bedroom furniture and what did you pay for it?  Don’t know?  That’s okay, let’s try an easier question.  When did you buy the TV in your family room and is it a plasma, LCD or a LED?

Whether you are the victim of a burglary, a fire or a tornado, most people are comforted they have insurance to cover the losses.  However, unless you’ve filed a claim, you may not be familiar with the procedures.

The adjustor will want to know the date and how the loss occurred.  Assuming you have contents coverage, the claim for personal belongings is separate from damage to the home.

You’ll be asked to provide proof of purchase, like receipts or cancelled checks, or a current inventory.  If they’re not available, you can reconstruct an inventory from memory.  The challenge is trying to remember things you may not have used for years and may not miss for years more.

Relying on memory can be a very expensive alternative.  A prudent homeowner will create a home inventory with pictures or videos while all of their belongings are in the home and they can see them.

Download a home inventory to make your project a little easier.

Reverse Mortgage

With all of the encouragement from celebrity spokespersons like Fred Thompson, Robert Wagner and Henry Winkler, there is a growing awareness of reverse mortgages.  The fact is that our population is getting older and more than 25 million homeowners meet the age requirement.

A reverse mortgage will allow homeowners age 62 or older currently living in their home to tap into their equity. The amount available is determined by the borrower’s age, the home’s current value and current interest rates.  The loan proceeds can be received in a single, lump-sum or periodic payments.  The closing costs can be paid in cash or rolled into the loan amount. 

There are no payments on a reverse mortgage but the homeowner is still responsible for property taxes, insurance, maintenance and other home costs. 

When the borrower dies, moves or fails to fulfill the terms of the loan, the lender is paid from the sale of the home.  The borrower or their estate is not responsible for more than the proceeds of the sale.  However, if the proceeds are greater than the amount owed to the lender, the remainder goes to the homeowner or their heirs.

Unlike normal mortgage requirements, the borrower’s income and credit are not used to determine the amount of the loan.  The homeowner must occupy the home as their principal residence and it must be free and clear of encumbrances or have substantial equity.

Reverse mortgages are an opportunity to generate income or funds for capital expenditures but they can pose risks to homeowners.  HUD, the largest insurer of reverse mortgages, is concerned about misleading or deceptive program descriptions encouraging borrowers to obtain HUD reverse mortgages also known as the HECM (Home Equity Conversion Mortgage).  As of June 18, 2014, FHA will only insure fixed rate reverse mortgages where the homeowner is limited to a single, full draw made at closing.

A reverse mortgage, like any financial decision involving a home, is an important decision that deserves careful consideration, due diligence and expert advice. 

For more information, check out The National Association of REALTORS® Field Guide to Reverse Mortgages, FAQs about HUD’s Reverse Mortgages  and Reverse Mortgages – Alternative Home Equity Funding by Real Estate Center at Texas A & M.

How Was It Measured?

In an attempt to compare homes, one of the common denominators has been price per square foot.  It seems like a fairly, straight forward method but there are differences in the way homes are measured.

The first assumption that has to be made is that the comparable homes are similar in size, location, condition and amenities.  Obviously, a variance in any of these things affects the price per square foot which will not give you a fair comparison.

The second critical area is that the square footage is correct.  The three most common sources for the square footage are from the builder or original plans, an appraisal or the tax assessor.  The problem is that none of sources are infallible and errors can always be made.

Still another issue that causes confusion is what is included in measuring square footage.  It is commonly accepted to measure the outside of the dwelling but then, do you include porches and patios?  Do you give any value for the garage, storage or other areas that are not covered by air-conditioning?

Then, there’s the subject of basements.  Many local areas don’t include anything below the grade in the square footage calculation but almost everyone agrees that the finish of the basement area could add significant value to the property.

Accurate square footage matters because it is used to value homes that both buyers and sellers base their decisions upon.

Let’s say that an appraiser measures a home with 2,800 square feet and values it at $275,000 making the price per square foot to be $98.21.  If the assessor reports there are 2,650 square feet in the dwelling and the owner believes based on the builder, there is 2,975 square feet, you can see the challenge.

If the property sold for the $275,000, based on the assessor’s measurements, it sold for $103.77 per square foot and by the owner’s measurements, it sold for $92.44 per square foot. Depending on which price per square foot was used for a comparable, valuing another property with similar square footage could have a $30,000 difference.

The solution to the dilemma is to dig a little deeper into where the numbers come from and not to take the square footage at “face value”.  It is important to recognize that there are differences in the way square footage is handled.

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.

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.

Another Source for a Down Payment

Most taxpayers know that they will pay a 10% penalty if they withdraw funds from their IRA before they turn 59.5 years old.  There is an exception for first-time home buyers that allows a penalty-free withdrawal of up to $10,000 per person if they haven’t owned a home in the previous two years.

This would allow a married couple who each have an IRA to withdraw a lifetime maximum of $10,000 each, penalty-free for a home purchase.

In many cases, the money would be used for a down payment or closing costs.   However, some buyers might consider this source to increase their down payment so they could qualify for a loan without mortgage insurance.

If the taxpayer qualifies for the penalty-free withdrawal, there may still be taxes due.  Contributions to traditional IRAs are made with before-tax dollars and the tax is paid when the funds are withdrawn.  Since Roth IRAs are made with after-tax dollars, there is no tax due when the funds are withdrawn.

Another interesting fact about this provision is that the taxpayer making the withdrawal can help a qualified relative which includes children, grandchildren, parents and grandparents.

Homebuyers who are considering using IRA funds for a home purchase should get expert advice from their tax professional concerning their individual situation.

Record Improvements Now

There is a significant difference in how the money you spend on your home is treated for income tax purposes.  Repairs to maintain your home’s condition are not deductible unlike rental property owners who can deduct repairs as an operating expense.

On the other hand, capital improvements to a home will increase the basis and affect the gain when you sell which may save taxes.

Additions to a home or other improvements that have a useful life of more than one year may be considered an increase to basis or cost of the home.  Other increases to basis may include special assessments for local improvements like sidewalks or streets and amounts spent after a casualty loss to restore damage that was not covered by insurance.

Unlike repairs, improvements add to the value of a home, prolong its useful life or adapt it to new uses.

You can read more about improvements and see examples beginning on the bottom of page 8 of IRS Publication 523.  For a form to keep track of money you spend, print this Improvement Register.

Consideration could be the key to your new home

Consideration associated with a contract is generally thought to be the price and terms but being sympathetic and courteous towards the seller could make a difference in getting the home you want.

Business people, like store owners, expect to deal with customers and even become to expect behavior that might not be accepted in a purely social atmosphere. Homeowners, on the other hand, may not be aware of what to expect.  They are opening the sanctity of their home to the public for review and criticism.  Buyers may be detached from emotional feelings while the sellers might react unfavorably to comments that are taken personally. 

1. Be on time for appointments; cancel if necessary.  The sellers may be rearranging their schedules and making an additional effort to make it convenient for you to see the property.
2. Be a good guest and respect the seller’s privacy.  Look at the home and avoid looking at the seller’s personal items; there is no reason to look in refrigerators or furniture drawers.
3. Don’t sweat the small stuff.  Try to focus on critical items of a home like location, floor plan, layout, size and not dwell on cosmetic items that are easily and inexpensively changed.
4. It’s not a good negotiating technique to list the defects.  Most people become defensive when presented with a list which could have the opposite effect of helping you get a better deal.
5. Limit your visits until you actually own the home.  It’s natural to be excited and making plans to move into your new home but it is still the seller’s until closing and they’re making plans to move too.
6. Negotiations are generally finished when a contract is completed.  It can be frustrating to continually be asked for “one more thing.” Make a deal with the seller and live with it.  If there’s something you’re not sure about, specify it in writing in the contract.

Some things are obvious: the seller wants the most for their home and the buyer wants to pay the least possible.  Showing consideration to the seller about things that don’t have anything directly to do with price can actually benefit the buyer.

The Question Every Cash Buyer Should Answer

Paying cash for a home seems like a huge advantage to qualifying for a mortgage and an appraisal.  However, for the fortunate few who don’t need a mortgage, there is a question they should answer before they make that decision: Do you think at any point in the future, you might put a mortgage on this property?

It’s important because paying cash for a home could affect the ability to deduct the interest if the homeowner should place a mortgage on the home at a later date.

Most homeowner’s know they can deduct the interest on up to $1,000,000 of acquisition debt on their principal residence but they may not understand the limitations of such debt.

Acquisition debt is the amount used to buy, build or improve a person’s principal residence.  The amount is not static but changes over time.  An amortized loan reduces the principal owed with each payment made and the acquisition debt is reduced accordingly.  If a person stays in a home long enough to retire the loan, the acquisition debt is reduced to zero.

Our current federal law allows a homeowner to deduct the interest on the acquisition debt plus the interest on up to an additional $100,000 home equity debt.  If a person pays cash for a home, the acquisition debt would be zero and the only interest deduction allowed would be for home equity debt.

If you answered yes or even maybe to the question, before you pay cash to buy your home, you should discuss your situation with your tax advisor.

A Lower Payment is Your Choice

94% of purchasers last year opted for a fixed-rate mortgage at some of the lowest rates in home buying history.  Yet, some of them will pay more in interest than necessary based on the time they’ll own the home.

If a person only plans to be in the home a few years, the adjustable-rate can offer significant savings.

Not only is the interest rate on the adjustable-rate lower than the fixed in the initial period, amortization on a lower interest rate amortizes faster than a higher interest rate.

In the example shown below, a $200,000 mortgage for 30 years is compared using a 4.25% fixed-rate to a 3.25% 5/1 FHA adjustable rate.  The first five years of the ARM generates a $113.47 a month savings which accumulates to $6,808.20.  In addition, due to faster amortization on lower interest rate loans, the unpaid balance at the end of five years will be $3,001 lower on the ARM for a total savings of $9,801.

Assuming the adjustable-rate mortgage was to escalate the maximum allowed at each period, the breakeven would occur in 8 years and 6 months. If a person were to sell the home prior to this point, the ARM would provide a lower cost of housing for the homeowner.

For some people, the uncertainty of how the interest rate may change is not acceptable.  On the other hand, for the risk tolerant individual who may be more confident in financial matters or who may know when they’ll be moving next, the ARM can be a smart choice.

To make projections using your individual numbers, see the Adjustable Rate Comparison.

An Exchange Means More to Reinvest

Section 1031 exchange for rental and investment real estate is a tool that allows investors to move the gain from one property to another without immediate income tax consequences. 

An instant benefit is to postpone the tax due which gives the investor a larger amount of proceeds to invest.  In the example shown, the investor has 21% more proceeds to invest and grow over time than if he had paid the taxes due instead of exchanging.

A legitimate long-term goal might be to make qualified exchanges from one property to another until the investor dies.  The heirs would then receive a stepped-up basis on the property based on the market value at the time of the decedent’s death and possibly avoiding taxes altogether.

There are specific requirements to be met in order for the exchange to qualify. For more information on exchanges, see IRS publication 544.  In addition to enlisting the services of a real estate professional familiar with investment property, seek the help of Qualified Intermediary to facilitate the intricacies of the exchange.  Your real estate agent can help you locate one.

Is the Window Closing?

With interest rates lower than they’ve been in over 40 years, it may be difficult to think of a “window of opportunity” closing.  However, it isn’t difficult to understand that it may very probably cost more to live in a home in the near future due to rising interest rates and prices.

Zillow recently reported results from a nationwide study that home values are expected to appreciate by 4.5% through the end of the year.  Coupled with Freddie Mac’s projection that rates are going up, the cost of housing for buyers by the end of the year will be higher than it is now.

While uncertainty of the future can stagnate some people, the fear of loss can be much more devastating when a person realizes that the amount they pay to live and enjoy a home could have been considerably lower had they acted when prices and mortgage rates were lower.

The following example considers a $250,000 purchase today with a FHA mortgage compared to what it might be at the end of the year with a higher price and interest rate as discussed earlier.  The net effect is that it will cost $191.87 to live in the very same home based on the cost of waiting to buy.

To see what the cost might be for your price range, use this Cost of Waiting to Buy spreadsheet.

Looking for the Largest Deduction

IRS allows taxpayers the option to take the standard deduction or the itemized deduction.  The astute taxpayer will compare to see which one will result in the greatest deduction and the election can be made each year.

The 2013 standard deduction for a married couple filing jointly is $12,200 and $6,100 for a single taxpayer.  It doesn’t require any proof of actual expense and has no requirement for home ownership.

Items that can be included on Schedule A for itemized deductions include: 

• Certain taxes paid for state and local income tax, general sales tax, real estate property taxes, personal property taxes or other taxes paid
• Qualified home mortgage interest, investment interest or possibly, mortgage insurance premiums
• Charitable contributions
• Casualty or theft losses
• Medical and dental expenses that exceed 7.5% of adjusted gross income if born before 1/2/49 or 10% if born after 1/2/49
• Job expenses and other miscellaneous deductions that exceed 2% of adjusted gross income

A non-homeowner taxpayer who has been taking the standard deduction needs to consider that it isn’t just the ability to deduct the mortgage interest and property taxes.

While the standard deduction might be the obvious choice for a non-homeowner, the combination of the mortgage interest and the property taxes plus other allowable deductions not recognized previously such as charitable contributions, now makes taking the itemized deductions significantly more advantageous.