Articles about Mortgages

Many homebuyers and potential homebuyers know that there can be tax benefits to owning a home versus renting one. So it might be helpful to break this down to see exactly what the savings are. Always check with your tax professional for information on your specific situation.

For this example, we’ll use a married couple that makes a combined income of $50,000 per year and is renting an apartment for $1,400 per month. The couple is looking to purchase a home for $175,000 and has 3.5% to put down on a Federal Housing Administration loan.

The payment on a 30-year mortgage at 5.5%, including mortgage insurance and taxes, is $975. Municipal taxes and property insurance bring the total up to $1,402 per month.

The taxes on the property are $300 per month, or $3,600 per year. The mortgage interest that the couple would pay for the first year comes out to $9,392.88. They now have $12,992.88 worth of deductions toward their tax returns. We’ll leave out mortgage insurance for this example.

Our couple, making $50,000 gross per year without other deductions, is in the 15% tax bracket. This means that if the couple were still renting, before other deductions they would pay $7,500 ($50,000 x 15%).

Now, with the $12,992.88 home ownership benefit, their taxable income is $37,007. At the 15% tax bracket, the new income tax due is $5,551.07.

This is a savings of $1,948.93 ($7,500 – $5,551.07) over the course of a year. This comes out to $162.41 per month.

With record-low housing prices and the record number of foreclosures and short sales that are available these days, potential homebuyers are coming out in droves for the right properties at the right prices.

This is especially true with first-time homebuyers.

First-time homebuyers are getting deals one homes that even a year or two ago might have been out of reach.

But there is a drawback.

When looking at short sales and foreclosures or other distressed properties, it’s important to keep in mind that the taxes might be higher than you think.

This is an issue that needs to be addressed when you go to get pre-qualified.

Prior to being distressed, the properties had some assessed values that either the county or other taxing authority had placed on them.

When a property’s price was dropped by the seller, the tax or assessed value most likely remained the same.

Let’s say you are a first-time homebuyer who can afford $1,400 per month for mortgage, taxes, property insurance, etc., each month. When you get qualified, your lender might assume, for example, a tax rate of 2.5% per year on any property you look at.

If your total payment comes to $1,400 per month, and then you go and look at a property where the assessed value is double the contract price then your effective tax rate is now 5%, doubling the tax component of your payment.

This can easily lead to frustration for all involved.

Homebuyers must know how much of the payment quoted by the lender is for taxes.

If you’re looking at distressed properties, then your effective tax rate will be the same as if you had purchased it at a pre-foreclosure or pre-short sale price.

In an effort to keep fraud in the mortgage industry to a minimum, a new set of laws was introduced in 2010 to address how lenders must disclose important information to borrowers.

The laws attempt to do two things.

The first, part of which has been in place for some time already, is to disclose information to borrowers in such a way that they can shop around and compare options.

The second is to disclose fees in such a way as to avoid surprises at the closing table, specifically for people purchasing a home as opposed to just refinancing.

Fees are disclosed on what is called the good faith estimate at the time of application. The costs disclosed in these estimates must fall within certain tolerances of the actual numbers that borrowers will see at the closing table.

The costs can definitely go up in certain circumstances, such as in the case of rate spikes, but this information must be disclosed to a borrower well in advance of closing so the borrower can decide whether or not to proceed with that lender. Should there be huge overages in the costs from an initial estimate, the lender must absorb the difference. The new rules will permit borrowers to compare apples with apples when looking for a mortgage.

When reviewing offers, however, keep in mind that a lender might charge a higher fee but offer a lower rate that might pay for the fee many times over and could be a better deal than a no-closing-costs loan with a higher rate.

A mortgage is a major obligation. People look at their annual mortgage statements to see what they paid, but they rarely think what can be done with their mortgages.

What to look for

When reviewing your mortgage, look at the renewal date, interest rate and prepayment options. By looking these things, it may be possible to find a way to pay off your mortgage faster or save money.

The renewal date is the date your mortgage has to be renegotiated. Knowing this date tells you how long you will be paying the current interest rate.

Take a look at the rate

Reviewing the interest rate is important. It may make sense to get a new mortgage if your interest rate is higher than current rates.

The things to think about when setting up a new mortgage are prepayment penalties, lawyer fees and other expenses.

The question to ask is “Will I save money?”  You may also want to think about other debts you have. Would you save money on those debts if they were included in your mortgage?

Look at the pre-payment options. Making prepayments will cut the interest you pay by thousands of dollars unless there are penalties. How much would you save if you used some or all of your prepayment options?

Look at the type of mortgage you have. Is it the right type of mortgage for your current situation? What are the risks attached to the type of mortgage you have? What will happen to your payment if interest rates change?

Your annual mortgage review will tell you if your mortgage is right for you and if you will achieve your mortgage goal.

The calculations can be complicated and you may want to ask your agent for help.

With home prices and interest rates at historical lows, now is the ideal time to at least be looking into your options with regard to purchasing an investment property.

Whatever your intent, your best bet is to start by doing two things. First, sit down and figure out what your goals are in purchasing a property, both short and long term. Second, figure out if it makes sense on paper.

A good real estate agent or appraiser should be able to help in determining property values in a given location, with specific attributes such as venue, square footage and number of bedrooms, and what those properties would bear in a rental market as well.

Looking at foreclosures, short sales and bank-owned real estate is a good place to start looking for properties, as they are often below market value. Keep in mind that they may need a bit of work.

Financing an investment property is similar to financing a primary residence, but the rates are higher as are the reserve requirements.

Also, investment properties are financed primarily by conventional loans, as the Federal Housing Administration lends only on homes where the buyer intends to live, with the exception of multiunit properties where the buyer plans on living in one of the units.

Plan on putting 25% to 30% down, and have six months worth of assets in the bank with which to make the payments. This is a bit steep, but lenders want to know that you are committed to making it work.

With mortgage rates at near-historic lows and the economy showing signs, albeit small ones, of a recovery, both fixed and adjustable rates will eventually increase.

Fannie Mae, Freddie Mac and the Federal Housing Administration have programs that allow borrowers with little or no equity in their homes to refinance existing mortgages. It is best to contact a mortgage professional directly if you’re seeking more details on such programs.

The question, though, is: Who should be looking into refinancing at this time?

The answer is: You should be looking to refinance at this time if you have either an adjustable rate mortgage or an interest-only mortgage.

Adjustable Rate Mortgages

Adjustable rate mortgages, known as ARMs, are tied to economic-related indices, such as Treasury rates. These indices, which are used to set the ARM rates, are low at this time. As they increase, so will the rates impacted by them.

While many ARMs have been adjusted downward in recent months, it is likely that they will be moving upward either in late 2010 or early 2011. Refinancing options for fixed rates will still be available in the future, but those rates will also increase.

In strategizing your mortgage plan, long term versus short term, you should weigh your options and, if applicable, secure your long-term rate at this time.

Interest-Only Loans

As with ARMs, interest-only loans have a period of time in the beginning where the payment is one amount, then over time it changes. Interest-only loans have a period in the beginning of the term of the loan, usually five or 10 years when the full amount of payments consists of interest only, after which the entire principal must be paid back, spread out over the remaining term of the loan.

When payments change from interest to principal, they will typically increase significantly, and if you have this type of mortgage, now is the time to look at refinancing.

First-time homebuyers who’d expected the $8,000 tax credit to expire last November 30 should be aware that it has been extended to mid-2010.

The catch is that the borrower must close on the home before April 30, 2010. If you are unable to close on the property by that date, you must have a fully executable sales contract and close by June 30, 2010, to remain eligible.

First-time homebuyers are those who have had no ownership in a primary residence in the last three years. This group includes owners of rental properties who haven’t owned a primary residence in the last three years.

The maximum income for a single filer is $125,000, and $225,000 for married filers. First-timers who have non-occupying co-borrowers on the loan with them are still eligible. The tax credit is set at a maximum of $8,000, or 10% of the purchase price, whichever is less. If you purchase a home for $60,000, you are eligible for a $6,000 credit. If you purchase a home for $400,000, you are still eligible for only $8,000.

Properties must be primary residences, meaning that the credit excludes second homes and rental properties. You must own the property for at least 36 months, or else you forfeit all or part of the tax credit.

Existing homeowners who are moving into a new primary residence and have owned a primary residence for at least five of the last eight years are eligible to receive a $6,500 tax credit. Please contact your tax professional for more details.

With all the changes that have been going on with home financing over the last few years, none needs more attention by homeowners and would-be homeowners at this point in time than the subject of credit.

Historically, income, assets and credit were the determining factors in whether a potential borrower was approved for a mortgage. In the recent and fairly recent times of low- and no-documentation loans, lenders got away from that, and that, in part, contributed to the current situation we are now in. That being the case, lenders are analyzing mountains of data from mortgages taken out in recent years and have come to the conclusion that borrowers with higher credit scores, regardless of income and assets, are less likely to default on their mortgages.

What this means for buyers is that keeping credit as well-managed as possible should be a priority, whether or not buyers are looking for a home. Below are two of the major contributing factors that make up a credit score:

• Balances Versus Limits: Keeping balances as low as possible, ideally under 30% to 40% of the limit on a credit card and other trade lines, will help keep scores high. Having a balance that is very close to the limit will cause scores to drop – but less than they would if the balance were over the limit.
• Recent History: Having made payments on time over the last 12 to 24 months will give the lender an indication of a buyer’s payment habits and let the lender know how likely the buyer is to make payments after taking on a mortgage.

Finding a mortgage these days, despite all the negative economic news we are hearing in the media, is easier than it has ever been.

Before you take the leap, though, there are a few things you should think about.

The first question that you might want to ask yourself is how long you intend to occupy the property.

Fixed or adjustable?

If you’re reasonably sure that you are going to be there for the short term, an adjustable-rate mortgage might be something worth looking into.

If you are unsure, consider going with a  fixed-rate mortgage.

The reasons for this are twofold.

First, you protect yourself against rate increases that an adjustable-rate mortgage would have.

Second, if you do wind up staying and want to refinance into a fixed-rate loan, chances are that the rate will be higher than it is now in early 2010.

Rates have been at record lows for a long period of time.

When the economy turns around, and it eventually will, both fixed and adjustable rates will increase.

Comparing mortgages

These days, mortgage disclosure laws for brokers and banks alike continue to get more stringent, with the best interest of the consumer in mind.

As a result, you are now truly able to compare apples to apples.

You should take the time to talk to different lenders and see what they have to offer, and then compare their documents to see which one really is offering the best deal.

It’s also important to understand what’s best for you in the long term.

If you’re planning to stay in the property for an extended period of time, say, 20 years or more, ask how getting a lower rate would benefit you, even if you have to pay more in fees to get it.

A savings of even $30 per month over 20 years will amount to $7,200.

Many properties in the current market – especially distressed ones or those that have been vacant for an extended period of time – can be good buys.

But they can also come with challenges.

The challenges could be significant damage from water or mold, or missing essentials like furnaces, hot water heaters or, in some cases, copper tubing.

Traditional mortgage programs, such as those offered by Fannie Mae and Freddie Mac, shy away from properties in need of major repairs or replacements.

There are other options, though, such as the increasingly popular Federal Housing Administration (FHA) 203(k) rehab program.

The program rolls the purchase price and estimated repair costs into one loan.

Let’s say you’re looking at a home with a purchase price of $100,000, and it needs $15,000 worth of work.

You would go to an FHA lender that handles 203(k) loans and get a loan for $115,000.

The first $100,000 would be disbursed at closing, with the remainder provided as the project progresses.

An independent FHA consultant is hired by the buyer, on behalf of the lender, to oversee the process and to protect the interests of you and the lender.

A general contractor is then selected.

A general contractor must be used, instead of doing it yourself or hiring someone you know to do it, unless he or she is a general contractor.

The contractor must have references and a line of credit that will allow him or her to pay for materials and services until he or she is reimbursed from loan proceeds throughout the course of the project.

Work must generally start within 30 days of closing and must be completed within 90 days of the start date.