January 28th, 2008 categories: Finances, Home Buying, Investments, Mortgages
No one knows what the future holds for you, your family, your job or your finances. But Bankrate.com can help you understand what you’re going to encounter when you embark on the sometimes-difficult journey toward the American Dream of owning a home.
When you get that urge to buy a house, the first thing to do is step back and ask whether it makes more sense to keep renting for a while. If you still want to buy, you need to figure out how much house you can afford. Here’s what they have to say…
Economic differences between renting and owning
If you’re looking for the best return on your money, historically you’re better off investing in the stock market than buying a house. Primary homes generally don’t earn the investment return of financial instruments such as mutual funds. While the stock market’s long-term average rate of return is in the range of 8 percent to 10 percent, housing historically has appreciated on average in the low- to mid-single digits. Don’t buy solely for investment gain.
On the other hand, Uncle Sam helps out by letting taxpayers deduct part of the mortgage interest and real estate taxes each year. Borrowers get the benefit only if they pay enough in one year to exceed the standard deduction. But that usually happens, especially during the first few years of a mortgage when most of each payment goes toward interest rather than principal.
Sunny side of homeownership
Owners enjoy other benefits, too. They build equity over time as home values rise and their mortgage balances shrink. They also don’t have to worry about their housing costs shooting through the roof because lenders can’t boost borrowers’ rates and payments, unless those borrowers have adjustable-rate mortgages.
Cloudy side of homeownership
When something breaks at an apartment, it’s the landlord’s problem. When it’s your name on the deed, the problem is yours. If you throw every penny into a down payment, you’re taking a big risk because you may not have enough money left to fix leaky pipes or buy a new air conditioner.
Potential buyers might want to hold off for other reasons. If there’s a good chance that you will be laid off soon, you might want to wait. The same goes for people who plan to leave a job soon. The monthly payment isn’t the only obstacle for this kind of customer. Closing costs and other home-buying fees, as well as the commission that most owners end up paying to real estate agents when they sell their homes, add up. People who have to sell after living in one place for only a short time can end up in the hole on their investments.
Explore all the options
Some middle-ground approaches to homeownership blend elements of buying and renting. Some of the more popular loan types are seller financing, “lease with an option to buy” and “contract for a deed” plans
Seller financing
With seller financing, the seller actually assists the buyer in purchasing the home, by “lending” the buyer either a portion of the amount to be financed or the entire amount.
Let’s say the buyer and seller agree on a price of $150,000 for the house. In many cases a lending institution would require a 20-percent down payment — $30,000 — and give the buyer a mortgage for $120,000. But if the buyer has only $15,000 cash, the seller could “take back” a second mortgage for the $15,000 the buyer is short. The buyer makes payments on the first loan to the bank and the second loan to the seller.
Another example of seller financing: If the sale price of the home is $150,000 and the buyer has only $15,000 for a down payment, the buyer gives the $15,000 down payment directly to the seller who agrees to carry the entire mortgage amount of $135,000. The buyer would make all payments directly to the seller.
Pro: Seller financing reduces the cash needed to get into a home and could dramatically reduce closing costs. Often the seller will be more flexible in accepting an underqualified buyer.
Con: The seller determines the interest rate for that portion of the mortgage being carried, and it usually comes with a higher rate and a shorter term. Perhaps most importantly, it very often comes with a balloon payment. This means that monthly payments would be computed as though the mortgage was to continue for, say, 30 years, but at the end of five or 10 years the entire remaining balance has to be paid in one lump sum. That normally requires refinancing at that point, when rates could either be lower, higher or about the same, or selling the house to meet that balloon payment. Story
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January 25th, 2008 categories: Real Estate
As tax season moves into full swing, realtors are quick to point out that home ownership allows a lot of tax advantages not available to someone who merely pays rent. A homeowner can deduct points used to obtain a mortgage when buying a home, mortgage interest paid during the year, and property taxes.
Those are the basics.
There are rules and guidelines to these deductions, however. Even though we have the best intentions, sometimes we’re a little “fuzzy” about exactly what is deductible. RealEstateABC.com offers us some clarifying points about what is in fact tax deductible to help cure homeowner’s confusion.
What are Points?
When most people buy a home, they generally obtain a mortgage. Mortgages have costs and one of those costs is the “loan origination fee.” The loan origination fee is usually a percentage of the loan amount, generally expressed as “points.”
For example, one “point” on a $150,000 loan would be $1500. One and a half points on the same loan amount would be $2250.
On VA and FHA loans, points are often broken down into two categories: loan origination fee (which is usually one point) and discount points (which are also a percentage of the loan balance). Both are deductible.
The loan origination fee must be expressed as points in order for it to be tax deductible.
Deducting Points when Buying a Home
When buying a home, points are deductible in the year they are paid, providing they meet certain conditions. The main conditions are that the mortgage is secured by the home you live in most of the time and that you used this mortgage to either purchase or build your home.
However, there are other conditions.
Your lender cannot inflate the points to include other items you would normally be charged. When buying a home, there are normally other charges such as appraisal fee, title insurance fee, property taxes, settlement fees, and so on. If by some miracle you are not charged these fees but your “points” are higher than normal…
In that case you can’t deduct the points. Sorry.
The cash you put into the deal must also exceed the amount charged in points. In other words, if your points were $3000, but you only had to put in $2000 to close, the IRS knows something is up. Your lender is inflating your loan amount to cover your points. Although a lender can technically do this, you wouldn’t be allowed to deduct the points.
The only other major condition is that the points must be clearly stated on the HUD1 Settlement Statement. This is a document you receive after closing that clearly lays out all the costs involved in buying the home. The seller also receives a HUD1.
Deducting Seller Paid Points
When purchasing a home, sometimes the buyer negotiates for the seller to pay some closing costs, including the points. Since the seller pays them and not the buyer, one would assume they could not be deductible, right?
Wrong.
If the seller pays the buyer’s points, the Internal Revenue Service allows the buyer to deduct this as an expense on their federal tax returns. However, the seller cannot deduct them, too. Paying the buyer’s closing costs, including points, merely reduces the net gain on the home for purposes in calculating capital gains taxes (which are usually deferred).
Deducting Points on Second Homes
Points paid to finance the purchase of a second home must be deducted over the life of the loan, not in the year in which they are paid.
If You Make Too Much Money…
If you make too much money, there are limits on what you can deduct, and for that you should see a Certified Public Accountant. In the year 2000, if your “adjusted gross income” was over $128,950 there is a limit placed on what can be deducted. For married couples filing separately, the figure is half that.
Other Deductible Closing Costs
With two exceptions, other closing costs are not deductible. Those exceptions are pre-paid interest and pro-rated property taxes.
When you buy a home, you may close on any day of the month. However, most lenders want their mortgage payment due on the first of each month. So if you close on the 20th, for example, you “pre-pay” ten days of interest as part of your closing costs. The ten days of interest pays you up to the end of the month. Your first mortgage payment will not be on the first of the following month, but the month after that. Unlike renting, where you pay in advance, mortgages are paid in arrears.
Since interest is a deductible expense, prepaid interest is also deductible.
A similar thing happens with property taxes. The seller’s last property tax payment may have covered part of the time where you will actually be the owner of the home. The settlement agent will calculate how much of that last bill you should pay and charge it to you as a closing cost called “pro-rated property taxes.” This is also deductible.
Certified Public Accountants
Whenever you reach a point where you begin itemizing deductions, it is best to have your tax returns prepared by a Certified Public Accountant. Internal Revenue Service rules and regulations can quickly become…confusing.
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January 25th, 2008 categories: Finances, Home Buying, Investments, Mortgages
So you want to buy a place of your own but can’t figure out how to pull together the necessary cash and financing? If you’re willing to think creatively, MSNMoney offers us seven offbeat options for buying your first home:
Read the full story for examples, pros, and cons of each of these offbeat options 
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January 24th, 2008 categories: Finances, Home Buying, Home Ownership, Investments, Mortgages
Adjustable or floating rate, 15-year or 30? How much mortgage can you afford? These are just a few of the many questions home buyers will find information on in Yahoo! Real Estate’s How-to Guide of Mortgage Basics.
So before you start mining for the perfect mortgage, make sure you have an understanding of the options available to you and check out their report. Some highlights include the following:
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