 |
|
In an effort to reduce the inventory of foreclosures that they have on their books, Fannie Mae has introduced a program called HomePath. The program offers homes that Fannie Mae was an investor that have gone into foreclosure, deed in lieu of foreclosure, or forfeiture.
If you buy a home through HomePath, in addition to a great buy, there are some great incentives such as:
- No appraisal needed
- No PMI (Private Mortgage Insurance)
- As little as 3% down on primary residences and 5% down on second homes and investment properties
- Credit scores as low as 660
- 3.5% incentive to be used towards closing costs and/or new Whirlpool appliances. (incentive applies only to owner occupied properties)
This program is only available through June 30, 2010 so you would have to sign a contract and close by then to be eligible. For more information and to search for available properties, click on the HomePath link above, or visit www.HomePath.com.
Unfortunately, you won’t like my answer but don’t shoot the messenger. According to well-known financial publishing house HSH Associates, “It’s going to be a long time coming.”
Before we can make any assumptions, we have to look at how far we’ve really fallen. According to the S&P/Case-Shiller Home Price Index, the popular measurement that tracks changes in the value of residential real estate in 20 metropolitan regions, prices have fallen 32.6% peak to trough, between 2006 and the third quarter of 2009. Obviously some areas such as Florida, Arizona, Nevada, and California were hit harder, so it will take even longer to recoup the values once seen there.
But going forward, expect appreciation to be S-L-O-W but steady. Predictions for the first half of 2010 are flat, with a 2.5% increase from July 2010 to August 2011. From there, expect the normal 3% annual appreciation from there. And I can’t imagine we’ll see anything more than that for a while.
With this in mind, let’s look at what happens to the value of a $200,000 house purchased at the top of the market in July 2006. By the time the housing market hits bottom, according to Case-Shiller, that property was worth only $134,800, a decline of 32.6%. Using the above estimates for appreciation, the value of this house won’t get back to the $200,000 until (gasp) July 2022! That’s right, 12.5 years until it gets back to where it was.
Like the stock market at the turn of the century, the housing bubble has a lot of people underwater with yet another asset.
In a rare intra-meeting move, the Federal Reserve increased the Discount rate .25% to .75% late yesterday afternoon. The Discount rate is the rate the Fed charges a bank for an emergency loan. This move was done to wean the banking system off of government credit and encourages them to borrow from private sources. The governing body cited improvement in the financial sector as the reason for the increase. Since the financial crisis started, the Federal Reserve has made unprecedented moves to stabilize the banking system and the economy.
This move does not affect the Fed’s main policy tool, the Federal Funds rate, which remains at -.25%. The fed funds rate is the rate one bank charges another for an overnight loan. This is the rate that influences business and consumer interest rates. The Fed reiterated the fed funds rate would remain near zero for “an extended period”, which means at least a few more months.
Although the mainstream media has had a field day with “the sky is falling” scenarios, mortgage rates will not and cannot go up anytime soon. One just need to look at the unemployment numbers and tight credit supply to realize that the housing market isn’t rebounding anytime soon. Without a housing turnaround, the economy can’t rebound as quickly as the government hopes. Expect rates to remain low for the remainder of 2010 and I wouldn’t be surprised if they remain low into 2011 as well.
If you have ever taken out a mortgage, you probably already know of the tax advantage provided by deducting your mortgage interest payments. But many homeowners overlook another tax break available for points paid to get a home loan. In some cases, points also could shave tax bills for folks who refinanced or got an equity loan or line of credit.
Each point is 1 percent of the loan amount. Lenders charge points as a way to make a profit, and borrowers generally pay points in exchange for lower mortgage rates.
If you paid points, the amount should be listed on the 1098 statement from your lender. This document also notes how much mortgage interest you paid. Both of these deductible amounts go on line 10 of Schedule A. (If the points aren’t on that statement, but show up elsewhere — for example, on your closing documents — enter them on line 12. Check the Schedule A instructions for details.)
Getting the maximum deduction
On a conventional mortgage (usually a fixed-rate, 30-year loan that is not insured by a federal agency), points may be paid by either buyer or seller or split between them. Even if the seller pays all the points, the buyer gets the deduction. Exactly how much of one and when depends on the loan circumstances.
Loan points are fully deductible in the year paid if they meet all these requirements:
1. The loan is secured by your main home, the house you live in most of the time.
2. Paying points is an established business practice in your area.
3. The points are generally what is charged in your region.
4. You use the cash method of accounting: You report income in the year you receive it and deduct expenses in the year you pay them. Most individuals do this.
5. The points are not paid in place of amounts ordinarily stated separately on the settlement sheet. That is, you cannot pay points in exchange for lower or no appraisal fees, inspection fees, title fees, attorney fees and property taxes.
6. The funds you come up with at or before closing, plus any points the seller pays, must be at least as much as the points charged. The money does not have to apply just to the points. It can include a down payment, escrow deposit or earnest money. But it all must come to at least as much as the points. For example, you took out a $100,000 mortgage and were charged $1,000 (one point). However, your lender only required a $750 down payment. In this case, you cannot deduct the full $1,000 points payment, only $750 of it. The remaining $250 must be deducted over the life of the loan. And you cannot have borrowed any of the money you paid at closing from your lender or mortgage broker.
7. The loan is used to buy or build your main home.
8. The points are computed as a percentage of your mortgage’s principal amount.
9. The amount is clearly shown on the settlement statement as points charged for the mortgage. The points may be shown as paid from either buyer or seller funds.
These point deductibility rules apply to loan costs associated with your primary residence. When the loan is tied to a property that is not your main home, the points cannot be fully deducted in the year the loan was made. Points paid on a loan secured by a second home or vacation residence, regardless of how the cash is used, must be amortized over the life of the loan.
Refi points
While points-deductibility definitely is a tax-saving option buyers should explore any time they get a loan to buy another home, a taxpayer who simply refinances also might be eligible for this tax break.
In most refinancing cases, a homeowner must deduct any loan points over the life of the loan. But if part of the refinanced mortgage proceeds are used to improve the main home and tests 1 through 6 listed previously are met, the portion of points attributable to the improvement can be deducted in the year paid. Any points related to the refinanced existing balance, however, are not eligible for immediate tax-deduction purposes; they still must be amortized over the life of the refinanced loan. These points-deductibility rules also apply to home equity loans or home equity lines of credit.
If, however, you use your refi to get some extra cash or take out a home equity loan or line of credit and then use the money for something else, such as paying college costs or buying a car, you still can deduct the points, but not all at once. The points deductions must be parceled out over the equity loan’s term.
To figure the annual deduction amount, divide the total points paid by the number of payments to be made over the life of the loan. You should be able to get this information from your lender. For example, a homeowner who paid $1,500 in points on a 30-year second mortgage (360 monthly payments) could deduct $4.17 per payment, or a total of $50 for 12 payments, for each tax year of the loan.
If you want the technical scoop straight from Uncle Sam, check out Internal Revenue Service Publication 530, Tax Information for Homeowners, and Publication 936.
First-Time Home Buyers
The Worker, Homeownership, and Business Assistance Act of 2009 has extended the tax credit of up to $8,000 for qualified first-time home buyers purchasing a principal residence. The tax credit now applies to sales occurring on or after January 1, 2009 and on or before April 30, 2010. However, in cases where a binding sales contract is signed by April 30, 2010, a home purchase completed by June 30, 2010 will qualify.
For sales occurring after November 6, 2009, the Act establishes income limits of $125,000 for single taxpayers and $225,000 for married couples filing joint returns.
The income limits for sales occurring on or after January 1, 2009 and on or before November 6, 2009, are $75,000 for single taxpayers and $150,000 for married taxpayers filing joint returns.
Existing Homeowners
The Worker, Homeownership, and Business Assistance Act of 2009 has established a tax credit of up to $6,500 for qualified move-up/repeat home buyers (existing home owners) purchasing a principal residence after November 6, 2009 and on or before April 30, 2010 (or purchased by June 30, 2010 with a binding sales contract signed by April 30, 2010).
For more information, visit the National Association of Home Builder’s website.
If you have been shopping for a mortgage, chances are you have found the process to be overwhelming and confusing. Besides the multitude of loan programs available, it can still be confusing even if you are only looking for a 30 year fixed due to the way each mortgage company quotes their rates and fees. Unfortunately, there is no “standard” way of quoting rates and fees among lenders. Some mortgage companies include items such as the appraisal and credit report fees in their closing costs and some don’t. Are they being deceitful in doing so? While some are new to the business and don’t understand how the business works, most are playing games by sounding cheaper than the rest.
So what’s the best way to shop for a mortgage? Always request a Good Faith Estimate. If you’re not familiar with this form, this is a standard form that mortgage companies use to disclose particulars about the loan such as the loan amount, rate, and most importantly a breakdown of the various fees and other charges such as escrows for taxes and insurance. The GFE,as it is sometimes called, loosely mirrors HUD’s Settlement Statement, the final statement you receive at closing. It is set up this way so that you can easily compare the fees from the original estimate to easily show discrepancies.
As you talk to each lender, be sure to ask for a complete list as well as a breakdown of their fees. Then ask them to e-mail you a GFE. If they can’t or won’t email an estimate, I would take them off your list. Not only do you have the right to see an estimate from each lender, you’re doing yourself an injustice if you don’t ask for one from each.
Although most folks choose to escrow their real estate taxes and homeowner’s insurance monthly, I am often asked whether or not this is wise. As long as you have a minimum of 20% equity in your property, you actually have the choice of “waiving escrows” or paying the taxes and insurance on your own when the bills become due each year. The only caveat being that most lenders charge an “escrow waiver fee”, which is commonly .25% or a quarter of one percent of the loan amount. This is a one-time fee due at closing, not something added to the rate.
Upon first glance, one would think that the answer lies in whether you could get a better rate of return on the money that you’d be putting into escrow each month if you kept it and invested it versus the waiver fee. But there are several factors that come into play when considering which way to go. For starters, it is convenient for most folks because it is budgeted for and handled by the lender at no extra cost. This way you’re not hit with a lump sum bill that you hadn’t budgeted for. If you do have a tight budget or you’re not real disciplined, this is probably the way you should go.
On the flip side, most lenders require three months of reserves to start out an escrow account. This is a cushion should the taxes or insurance premium go up (as they generally do) the following year. And if there aren’t enough funds, they hit you up with a shortage which is due either as a lump sum or they will conveniently add it to your monthly payment, which can crimp your budget.
The biggest problem is that escrow accounts can be difficult for the average person to reconcile, although the lender sends an “Escrow Analysis Statement” at the end of the year. But too many people rely on the lender to be correct, and millions of dollars go unaccounted for each year by way of escrow accounts. My advice is to pony up the fee and waive the escrow account. However, if you’re more comfortable carrying an escrow account, be sure that you can account for every penny flowing in and out of the escrow account. If you don’t understand the analysis statement, be sure to contact the lender and go over it in detail until you do.
One of the worst ways to compare loans, in my opinion, is to shop the “APR” or Annual Percentage Rate. The APR is an expression of the effective interest rate that will be paid on a loan, taking into account certain one-time fees and standardizing the way the rate is expressed. While the formula can be complicated, the underlying foundation is made up of the interest rate and any service-related fees being charged on a loan. Examples of service-related fees would be processing, underwriting, and closing fees. Items such as appraisal reports, credit reports, and title insurance are tangible reports and therefore are not considered finance fees and don’t go into the APR.
The APR is intended to make it easier to compare lenders and loan options. One should be able to call and inquire as to what a lender’s APR is and go with the lowest one. Unfortunately, despite repeated attempts by regulators to establish usable and consistent standards, the APR does not represent the total cost of borrowing nor does it really create a comparable standard. Some lenders will manipulate the APR, either intentionally or unintentionally by omitting certain fees from the APR, thus reducing the rate.
The best way to find the lowest rate and cheapest closing costs is to ask just that. By asking a lender to break those out separately, you can better analyze and size up their offer. As I mentioned in my previous article “Let’s Go Shopping”, requesting a Good Faith Estimate is the best way to accomplish this.
Ever wonder why there is such a disparity from lender to lender when it comes to rates and fees? It really comes down to two things, marketing and their compensation. You see, most lenders are compensated by the companies they sell the loans to and therefore the higher the rate, the more compensation they receive. That is why it is in the lender’s best interest (no pun intended) to get you into a higher rate loan. What may only amount to a $20-30 higher monthly payment for you can mean hundreds or even thousands more in compensation to the lender.
This is where the marketing aspect comes in. Some lenders will use this compensation to subsidize the fees they normally charge. That is why you can find lenders with lower rates and higher fees or higher rates and lower fees. One way or another, you end up paying for it. Essentially you’re just financing it into the rate, with less due out of pocket at closing. If you shop long and hard enough, you can find the best of both worlds: a lender with low fees and low rates.
All of this is assuming a loan with no points as points should only be paid to buy the rate down. However, this is usually not a wise investment.
Ever wonder why you can get a better deal going through a mortgage broker than you can if you go directly to a lender? After all, the mortgage broker just turns around and sells it to a major national lender anyway? So logic dictates that cutting out the “middle man” should yield you a better deal, right? Not in the case of mortgages.
Believe it or not, 65% of all mortgages in America are originated by mortgage brokers. Because many of those brokerages are small businesses, they can keep their overhead low and effectively lower their margins. This means lower rates and closing costs for consumers. Although lenders quietly solicit mortgage business, it costs them much more to originate a loan as they have to maintain a larger staff to do so. Therefore, they rely on thousands of mortgage brokers who in turn have “mortgage sales people” to find the business. The lender pays the broker a commission for finding, processing, and delivering the loan to them.
But not all mortgage brokers were created equal. You still want to shop for the best deal as some charge unnecessary origination fees for their services. But don’t be fooled, the lender is paying them for their services so you shouldn’t have to.
|
 |
|
|
