Relationships come and go in our lives, some we keep and others leave our lives unnoticed. There are professional relationships that require long-lasting work. Relationships like accountants, bankers, and financial advisors require time and trust. Unless you plan on becoming a real estate investor, your mortgage broker is not a relationship that you might keep long after services are rendered.
It is important that you discuss concerns with any broker you speak with. If you get any feelings that a broker is hiding something, say “Thanks for your time,” and leave. If you think, even for a moment, that he’s not being forthright, he probably isn’t. If they tell you that they are not sure about anything, but they promise to find out, give them a brief chance.
Once you have found a mortgage broker that you trust, discuss mortgage options with him. Will a fixed-rate or adjustable-rate mortgage be best for you? What can you do to reduce fees and/or interest rate? If you trust your broker, he will lead you right.
Now let’s discuss mortgage insurance.
Now you have a home…the stress begins. This is your little piece of paradise, but how are you going to protect it? Some would say, “Buy a gun!” That’s a thought…but I was thinking more along the lines of insurance. Many may remember Chris Rock’s rant about insurance, he said: “They should call it ‘in-case-s***.’ Because you need some ‘in case s*** happens.” He may have been talking about health insurance, but it still applies the same.
When considering the purchase of homeowner’s insurance, be sure to shop around. Ask for details of things covered and not covered. Ask about flood insurance; even if you don’t think you need it. Ask about discounts offered. Rememeber, the worst they can say is “No,” and if they do, say, “Thank you,” hang up and move on to the next agency.
Bad Credit Mortgages
This topic is almost silly to discuss considering that bad credit mortgages are partially responsible for the current economic situation…but I digress. Prior to September 2008, lending institutions were allowed, some say pushed into, making loans to people who the banks knew could not afford the home they are attempting to purchase. What happens when over 50% of home mortgages are issued by Fannie Mae/Freddie Mac and are given to people attempting to buy above their means? A major collapse of the home market, or as real estate investors call, the burst of the home market bubble.
Currently, lenders are extremely cautious to lend to anyone with less than a 650 (out of 850) credit score. However, there are still lenders that will lend to people with no/slow/bad credit; but you will pay for it, and heavily. Let’s look at some hard numbers.
These numbers are for estimate purposes only:
| Good Credit | Bad Credit | |
| Loan Amount: | $100,000 | $100,000 |
| Term: | 30 years | 30 years |
| APR: | 4.75% | 6.50% |
| TTL Int. Paid: | $142,486.80 | $195,001.20 |
Yep, 1.75% equates to over $50,000 more in interest paid over the life of the loan. There are several options if you feel you have a bad credit mortgage. First, if you know you’ve made your payments on time and never missed one or made arrangements, get your Tri-merged credit report with score (you may have to pay for this information.) Take your credit report to your banker and try to negotiate a lower interest rate, or discuss refinancing options (even if you are only 5 years into your loan.)
Avoid Capital Gains Taxes When Selling Your Home
I am not going to tell you how to dress up your home to make it more eye appealing… there are plenty of TV shows to tell you these tips. I have heard horror stories from first-time-home-sellers take the check from selling the home and pay off the mortgage, then buy a new car or furniture for their new home.
STOP! The moment you spend one penny of profit from the sale of the property you negate your chances of AVOIDING CAPITAL GAINS TAXES! President Obama will raise capital gains taxes from 15% (under Bush) to 20% in 2010.
“Aaron you are telling me to break the law by avoiding taxes?” Wrong, there are ways to legally avoid taxes with real estate. EVADING taxes is knowingly and deceitfully hiding information with the intent to not pay taxes.
“So how do I legally avoid Capital Gains taxes after I sell my home?” After you sell your home you have one year, from close, to roll that profit into your new home. By using Form 1031 you can roll 100% of that profit into a new home and pay 0% interest. This can also be used when flipping properties.
When flipping a property, simply remember, all the work that you do is still earned income. There is another way to avoid certain taxes, and that would be to utilize a property that you refurbished and rent it out. In this current economy, people are loosing their houses and will need a house. I’ll discuss rental properties and investing in real estate at a later time.
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- Tags: capital gains, flipping, selling a home, taxes
Reverse Mortgages, Part IV - Estate Planning
In the area of estate planning there are some options. If you are healthy enough and can either buy extra life insurance or increase your existing policy; increase it to at least what your home is valued at during the loan close process. If you are not healthy, cannot afford more insurance, or simply cannot get insurance due to your age, do not fret, there are other options.
In the even that your home is worth MORE than the reverse mortgage is, your heirs have the option to refinance into a traditional loan and keep the house, or sell the house and keep the extra money. If your house is worth LESS than the reverse mortgage, your heirs have no obligation to the bank. The bank will simply sell your home for whatever they can get for it, but if the heirs want to keep the house, they may also refinance into a traditional loan.
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Reverse Mortages, Part III - Tax Issues and
The major issues to consider with regard to reverse mortgages are taxes and government benefits. All need to be considered when planning to apply for or accept a reverse mortgage. To fully understand all aspects of reverse mortgages you need to speak with a tax professional, your accountant, or your financial advisor. If you trust your banker, and trust him that he will tell you what’s best for you, then ask him about your bank’s reverse mortgage offers.
In the realm of taxes, there are two that are important areas of taxes to inquire about: tax deductions and property taxes. “No income tax?” That’s right, no income tax. Since your HECM is considered a loan, it is NOT eligible for income tax. The interest IS tax-deductible, however, the only time that interest is paid, is when the loan is repaid. Since the loan is repaid when the owner sells the house or is no longer living in the home, you will have a large amount of interest. The interest is deductible only in the year that the interest is paid. That means there will be a large deductible that you (or your heirs) will apply for that year. The other is property taxes. As I’ve said before, there is NOTHING that you can do to avoid property taxes. You will have to pay them until you die or no longer own that property. The old adage is right, “The only thing that is certain is death and taxes.” Unfortunately, they are even trying to tax our death…so sad.
Even though HECM money is not considered income, if too much is withdrawn and not used soon enough, certain need-based government programs could be at risk. The best thing to do is contact your Medicare/disability/social security counselor prior to withdrawing money, or even before finalizing the loan.
Estate planning concerns in Part 4.
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- Tags: hecm, medicare, reverse mortgage, social security, taxes
Reverse Mortgages, Part II: The Numbers
Continuing on with reverse mortgages, let’s take a look at some numbers. Because reverse mortgages can be a tad confusing, I have provided an example:
A 75-year-old woman owns a home valued at $250,000. She qualifies for a HECM credit line of $135,484 with a 7% interest rate. At closing, she withdraws only $67,742 of the loan. Assuming that the interest rate stays the same and she remains in the home for 12 years and does not take any other loan withdraws, this is the cost of her reverse mortgage:
| Total Amount Borrowed |
$ 67,742
|
| Loan Costs | |
|
$ 12,000
|
|
$ 7,933
|
|
$ 5,040
|
|
$111,056
|
| Total Loan Costs |
$136,029
|
| Total Loan Amt. Owed |
$203,771
|
| Souce: AARP (www.aarp.org/revmort) |
Look at these numbers closely. Most reverse mortgage lenders will promise that the total will not exceed the appraised amount. However, the interest rate of 7% is on the whole credit line not the amount withdrawn. That’s right, even if you don’t utilize 100% of the credit line, you are still responsible for paying the interest on the credit line. It’s like having a $10,000 credit limit with an 18% interest rate and only $2,000 worth of charges but paying interest on the whole credit line.
My suggestion to anyone who would seek out a reverse mortgage is negotiate everything. Remember, there are two ways this mortgage is repaid: upon sale of the property or by no longer LIVING in the house.
I will cover Taxes and Estate issues in the final two parts.
Reverse Mortgages, Part I - What is a Reverse Mortgage?
I saw an advertisement the other night about reverse mortgages. Now, I had heard about these before but I was not well versed on what they are. When I found they were geared toward homeowners 62 years and older, my knee jerk reaction was they were stealing homes from older people. But after a little research, I found that there are some positives, but educate yourself completely before jumping into a reverse mortgage.
What is a reverse mortgage?
Officially named Home Equity Conversion Mortgage, this program was designed for seniors 62 and older who wish to stay in their home but need money for any reason. The maximum loan allowed for 2009 is $650,000 (this amount will only last until the end of 2009.) All fees and interest are paid when the owners sell the home or pass away. I will cover those issues of estate planning in Part 3.
Mortgage Rates: Fixed Rates vs. Variable Rates
Mortgage rates are always changing, so it is important that you understand factors that can make them change day to day, especially if you sign up for a variable rate mortgage. Below I will discuss the differences between fixed and variable rate mortgages, as well as factors that can cause changes in both.
A fixed rate mortgage is just like is sounds, fixed. The interest rate will remain the same throughout the term specified in the mortgage. While you might see other rates lower than yours, they might be variable rates, also called adjustable rates.
What are adjustable rates? Really…okay, these are not as clear-cut as fixed rates. Variable rates can change at different intervals, depending on what your mortgage broker suggested. These rates vary based on many different factors. Some of these factors are, 1-year constant-maturity Treasury (CMT) securities, the Cost of Funds Index (COFI), and the London Interbank Offered Rate (LIBOR). Yes, depending on your bank, your monthly payment could vary based on global economic indexes. Be very wary, adjustable/variable rate mortgages are very tied to economic trends. So, watch the economy and know what’s going on in the world…and weigh the costs.
Mortgage Calculators
If you’ve gone to any real estate website looking for a home to purchase, you might have noticed a link that allows to “calculate your payments”. How do these work? Should I trust these calculators? Ultimately, no matter how detailed the calculator is, they only provide you with ESTIMATES! There are many different calculators out there; Private Mortgage Insurance calculators, Property Tax calculator, and Extra Payment calculator.
Private Mortgage Insurance calculator: A good mortgage calculator will include a Private Mortgage Insurance calculation for down payments less than 20%. More often than not, these are not they type associated with real estate offices, most of those are simple estating tools for principle and interest only.
Property Tax calculator: An even better calculator will also ask you about property taxes for your property from the previous year. Often provided with information on the house. However, the best way is to simply ask the municipality that governs what the current tax rate is for the property. An easy approximation is $2,000 for a $200,000 home…which estimates at and extra $166 per month.
Extra Payment Calculators: To be honest, I’ve not come across many calculators that include this, there are great loan amortization templates for Excel that includes an extra payment field. But if you find one, they offer some really great insight to how much time you can shave off your mortgage. Sometimes only $50 per month can shave off 4 years of payments…and $100 can decrease your term by 7 years.
The problem with these calculators is too many people trust these as the final word…you want the final word, discuss the terms with your loan officer…they will show you exact fees and such. So, get the estimate, then determine if you can support the loan with your current income…if not…renegotiate, turn to creative options, or find another home.
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Some related links:
Federal Reserve Mortgage Calculator Rates
How to Calculate a Mortgage
