Category Archives: Personal Finance

Do You Have a Home Inventory? Get One!

Homeowner Checklist“Hopefully, you’re fortunate enough to have never had a major incident at your home.  But if you did, would you know what was missing or damaged?  Would you know what you paid for it?  How long you had owned it?  Take these steps to be prepared,  just in case.”

Denise Buck & Ed Johnson – DC Metro Realty Team

 

 

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.

Understanding Reverse Mortgages

Reverse Mortgages

 

“Reverse Mortgages sound like a good idea on the surface.  And they can be, but they are not for everyone.  There are different types of programs out there and anyone considering these plans needs to do their homework before making a decision on which one is the best option for them.”

 

Denise Buck & Ed Johnson – DC Metro Realty Team

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.

Another Source for a Down Payment

IRADownPayment“Not everyone knows that they can actually withdraw funds from their IRA, penalty free for the purchase of a home, if they haven’t owned a home in the previous two years.  This can be a great way to increase what you have to put down on a home.”

 

Denise Buck & Ed Johnson – DC Metro Realty Team 

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.

The Worst Mortgage Advise You Can Get

Worst Mortgage advise“It’s amazing how  many people who have purchased a home in the past automatically become ‘experts’ in mortgage advise.  There is an awful lot of bad information out there and most of it out dated.  When considering financing a new home, or re-financing your current home, consult with a lending professional first to get the most current and accurate information.”

Denise Buck & Ed Johnson – DC Metro Realty Team 

Are you thinking about buying or refinancing a home in the near future? If so, chances are you’re getting all kinds of advice from well-intentioned friends and family.

Just remember to keep this important piece of advice in mind: Don’t listen to everything you hear. According to industry professionals, some words of wisdom are not wise at all.

To help you separate the bad advice from the good, check out five common statements that should cause you to cover your ears immediately.

Bad Advice No. 1: “A 30-year fixed-rate mortgage is best for everyone.”

The common perception is that a 30-year fixed-rate mortgage is always the best option, because it typically offers lower monthly payments than other shorter-term mortgages. But the kicker is that interest payments over the course of the loan can be quite substantial when compared to mortgages with shorter terms and lower interest rates.

Consider this example based on rates from Freddie Mac, as of March 20, 2014:

A 30-year loan on a $200,000 property with a 4.32 percent interest rate has a monthly payment of $992 and interest payments totaling $157,153 over the life of the loan. On the other hand, a 15-year loan for the same property with a 3.32 percent rate has monthly payments of $1,412 and yields $54,187 in total interest paid. So by opting for the shorter mortgage, you could save more than $100,000 in interest, which is worth it if you can meet those higher monthly payments.

Whether or not a 30-year fixed mortgage is the right choice depends on the borrower’s goals and financial situation, says Houtan Hormozian, vice president of Crestico Funding, a Los Angeles-based mortgage brokerage firm.

For example, if you have cash saved up for job, family, or medical emergencies and you already have college and retirement funds set up, then a 15-year mortgage might be a better option. Without money saved up, losing a job or an expensive surgery could deal a hard blow to someone’s finances, including their ability to make mortgage payments.

Bad Advice No. 2: “Stay away from adjustable-rate mortgages.”

An adjustable-rate mortgage (ARM) is a loan with an interest rate that is fixed for a period of time then adjusts, causing the ARM payments to increase or decrease.

ARMs get a bad rap, because they’re seen as risky products that contributed to the housing bubble, easy credit, and ultimately, the subprime mortgage crisis.

“The 30-year fixed-rate mortgage is the most popular type, because everyone is afraid of adjustable [rates],” Hormozian says.

In fact, only 3 percent of homebuyers chose adjustable-rate mortgages in the first half of 2013, reports Freddie Mac. With that low figure it’s easy to get scared off, too. But the fear associated with ARMs is somewhat unjustified, according to Hormozian.

“Depending on the consumer, circumstances, and knowledge of their economic situation, there could be an ARM that fits them,” says Frank Percival, board president of the Washington Association of Mortgage Professionals.

One major benefit of an ARM is that it typically will have a lower interest rate than fixed-rate mortgages at the outset. For example, a 5/1 ARM will have an initial fixed rate for the first five years then adjusts afterward.

This is a great option for homeowners who plan on moving out of their house before the rate adjusts. However, this does carry some risk, since personal finances and the condition of the housing market may make moving difficult in a set amount of time.

So choosing an ARM may come down to your financial situation and your aversion to risk. Percival explains that if a homebuyer with a 5/1 ARM saves $200 a month in interest compared to a 30-year fixed mortgage, it may make sense to choose that type of loan. However, if someone wants to err on the side of caution, given the risks discussed, a 30-year fixed mortgage might be the more sensible choice.

Bad Advice No. 3: “If your home is underwater, consider a short sale.”

“When the housing market was bad a year or a year and a half ago and the values of homes were low, people were encouraged from realtors [and] buddies at work to walk away from their home,” says Percival. He calls this “one of the worst pieces of advice in recent history.”

If desperate homeowners took that advice, they would usually do a short sale on their home. What exactly is that? It’s a real estate transaction in which a lender agrees to let the borrower sell his or her property for less than – or “short” of – what is owed on the mortgage.

Even if your home is underwater, it’s a bad idea, asserts Percival. If homeowners can still afford to make their mortgage payments, then they shouldn’t do a short sale.

“People who didn’t have medical emergencies or lose their jobs were dropping their keys and leaving their homes,” Percival says. This is a dumb choice, he adds, since it’s possible that their home value could go have gone up.

Plus, if you do a short sale, you may have to wait several years to qualify for a home again, says Percival. The reason? Because a short sale usually lowers your credit score just as a foreclosure would, according to myFICO, the consumer division of FICO. Shortsellers may be able to qualify for a mortgage in as little as two years, but this may depend on a variety of factors, like how much you are able to put down.

Beyond your own finances, short sales have a far-reaching effect, according to Percival.

“Every short sale or foreclosure reduces the value of every home in the neighborhood,” he says. “If folks would have waited for the recovery to kick in and housing prices to go up, they could have sold it at a profit. People just wanted to walk away from debt.”

Bad Advice No. 4: “An FHA loan is your only option.”

First-time homebuyers are particularly susceptible to bad advice. For example, homeowners who can’t afford a large down payment may hear that a government-backed FHA loan is their only option, since the down payment requirement can be as low as 3.5 percent of a house’s purchase price. But that’s not necessarily the case.

Some homeowners might be surprised that getting a conventional loan might be better suited – and easier – for them than an FHA loan, says Aaron Vantrojen, president of the Arizona Association of Mortgage Professionals, says.

The standards to qualify for an FHA loan have tightened, says Vantrojen. Plus, the FHA loan has become more expensive in recent years due to its rising mortgage insurance premium (MIP).

According to the U.S. Department of Housing and Urban Development, the mortgage insurance on an FHA loan must be carried for the life of the loan. On the other hand, the private mortgage insurance (PMI) on conventional home loans can be dropped when equity in the home reaches 20 percent, Vantrojen says.

As a result of dropping the insurance premium, homeowners can save thousands of dollars in the long run. “The annual mortgage insurance for FHA loans is so high, we are trying to get people into conventional loans if they qualify,” Vantrojen says.

The biggest advantage FHA loans have over conventional loans is the low down payment requirement. But conventional loans, with a 5 percent down-payment required, might be a better deal when you factor in the mortgage insurance payments, says Vantrojen.

“I will always look at options for conventional loans [for homebuyers],” says Vantrojen, president of Geneva Financial, a mortgage banking firm based in Tempe, Arizona. “The guidelines for conventional loans are changing, and a person who couldn’t qualify for one a month ago might be able to qualify now.”

Bad Advice No. 5: “Trust me, I know what I’m talking about.”

If you’re in the market for purchasing a home loan and in need of a little guidance, you might want to think twice about listening to someone who tells you: “Trust me, I know what I’m talking about.”

“One of the most common mistakes is not getting advice from a mortgage investment advisor,” says Hormozian. “Any time you don’t seek advice from a professional, you could be in trouble.”

But not all mortgage professionals are created equal, which is why Hormozian says homebuyers should make an effort to consult and get the opinions of established mortgage advisors, licensed mortgage companies, and reputable professionals when they are ready to purchase a loan.

“At the end of the day, my job is to make sure my client will have a comfortable life and a sound investment,” Hormozian says. “If I feel they are going to have a hard time making a payment or living up to that liability, I have to advise against it.”

For example, if someone tells you it’s a great idea to buy investment property as a source of instant income, you better consider the source. Instead of talking to real estate agents, homebuyers should talk to unbiased resources, who could help them avoid potential mortgage heartaches, says Vantrojen.

 “Do your due diligence, talk to industry professionals – people who have been real estate investors and [who] can tell you the highs and lows of owning real estate,” he explains.

If owning a new home for you and your family is a main objective, Percival says it might be a good idea to check whether you are dealing with licensed mortgage professionals. He suggests verifying mortgage loan originators (MLOs) and their MLO license numbers through the National Mortgage Licensing System (NMLS), which performs this service for free.

Originally appearing on Yahoo! Homes.com

Investment Property Exchanges Save $’s

Exchange 1031“Many of our clients become landlords by renting out their 1st home when buying a new one.  The following article provides some information on benefits of using a Section 1031 when buying and selling your rental or investment properties.”

DC Metro Realty Team – Denise Buck & Ed Johnson

 

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 on Low Interest Rates?

Window“We’ve been watch the fluctuation in the market over the past year and the general consensus is that rates are going up the rest of the year, along with the prices of homes.  This means that buyers who wait will have less buying power”

DC Metro Realty Team – Denise Buck & Ed Johnson

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 more each month 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.

cost of waiting.png

Which Tax Deduction is Best for You?

“Here are some basic tips on determining whether to itemize your deductions or to take a standard deduction on your taxes.  There’s more to consider than just whether or not you have a mortgage.”

DC Metro Realty Team – Denise Buck & Ed Johnson

 

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.

Be sure to Deduct the Points you Paid

Deductibility“Always remember to take the proper deductions on your taxes when you have bought or refinanced your home.”

DC Metro Realty Team – Denise Buck & Ed Johnson

Prepaid interest, sometimes called “points”, is generally tax deductible when a person pays them in connection with buying, building or improving their principal residence. When points are paid on a refinance, they are not a current deduction but have to be taken prorata over the life of the mortgage.

For instance, if $3,000 in points were paid on refinancing a 30 year mortgage, a deduction of $100 per year is allowed. When the loan is paid off or replaced by refinancing again or the home is sold and the mortgage paid off from the proceeds, the balance of any un-deducted points may be taken in that tax year.

Your tax professional needs to be made aware of any of these situations so that he or she can accurately reflect the deductions in your return. Currently, the most common situation is homeowners may be refinancing their home for the second, third or even, fourth time. If there are points that have not been completely deducted, they need to be treated in the year of refinancing.

For more information, see points in IRS Publication 936; there is a section on Refinancing in this publication. For advice considering your specific situation, contact your tax professional.

Should I Rent My House If I Can’t Sell It?

Home-For-Rent“It’s not uncommon for people decide to keep their current home and rent it out, when they decide to buy a new home.  But is that the right decision for you?  There are many factors to consider first.  Here are 10 things to think about before you take the plunge into becoming a landlord.”

 

DC Metro Realty Team – Denise Buck & Ed Johnson

A recent study has concluded that 39% of buyers prefer to rent out their last residence rather than sell it when purchasing their next home.

The study cites that many homeowners were able to refinance and “locked in a very low mortgage rate in recent years. That low rate, combined with a strong rental market, means they can charge more in rent than they pay in mortgage each month, so they are going for it.”

This logic makes sense in some cases. We believe strongly that residential real estate is a great investment right now. However, if you have no desire to actually become an educated investor in this sector, you may be headed for more trouble than you were looking for. Are you ready to be a landlord?

Before renting your home, you should answer the following questions to make sure this is the right course of action for you and your family.

10 Questions to Ask BEFORE Renting Your Home

1) How will you respond if your tenant says they can’t afford to pay the rent this month because of more pressing obligations? (This happens most often during holiday season and back-to-school time when families with children have extra expenses).

2) Because of the economy, many homeowners can no longer make their mortgage payment. What percent of tenants do you think can no longer afford to pay their rent?

3) Have you interviewed a few experienced eviction attorneys in case a challenge does arise?

4) Have you talked to your insurance company about a possible increase in premiums as liability is greater in a non-owner occupied home?

5) Will you allow pets? Cats? Dogs? How big a dog?

6) How will you actually collect the rent? By mail? In person?

7) Repairs are part of being a landlord. Who will take tenant calls when necessary repairs arise?

8) Do you have a list of craftspeople readily available to handle these repairs?

9) How often will you do a physical inspection of the property?

10) Will you alert your current neighbors that you are renting the house?

Bottom Line

Again, renting out residential real estate historically is a great investment. However, it is not without its challenges. Make sure you have decided to rent the house because you want to be an investor, not because you are hoping to get a few extra dollars by postponing a sale.

This article originally posted by Keeping Current Matters. Read more articles like this at www.KCMblog.com.

Your Home is Worth… Current Market Value.

Fortune Cookie“Not setting the proper expectations on a homes Market Value with either the Buyer or Seller will negatively impact the process and disappoint all parties involved.  Starting out with the right information will always help make the process go smoother and faster.”

DC Metro Realty Team – Denise Buck & Ed Johnson

Coffee should be hot. Beer should be cold. Mexican food should be spicy. However, if these things are less than the standard that you expect, there are not any lasting consequences.

As the value of the object in question rises, either in price or gravity, the expectations usually increase and decisions become progressively more important. Marriage, children, health and careers are certainly a few of the more important items that bear careful consideration.

The sale of the largest asset that most people own, their home, also merits having reasonable expectations. A homeowner should expect to get the market value for their home in a reasonable period of time with as few inconveniences as possible.

According to the latest Home Buyers and Sellers Survey, more homeowners are entrusting the sale of their home to real estate professionals. Owners can increase the likelihood of a favorable outcome by sharing their expectations with agents prior to listing their home for sale.

Challenge your agent to explain what they intend to do to:

  • Price the home correctly
  • Prepare the home to make a good impression
  • Position the home in the marketplace

It is reasonable for a seller to expect the agent will work hard to sell the home; will tell the truth and represent the client’s interests to the best of their ability. Agents exemplify remarkable service when they exceed the seller’s expectations.