Category: Home Finance

When It's Important...Find the Facts

2/11/2019

Most parents don't put a lot of credence in the statements "Everyone is doing it" and "No one does that anymore."  They'll dig a little deeper and get the facts of the situation.  Interestingly, when it comes to buying a home, similar common myths continue to prevail surrounding what it takes to buy a home.

One of the most common myths is that it takes 20% down payment to get into a home.  Certainly, an 80% mortgage might have the most favorable interest rate. It won't require mortgage insurance and qualifying requirements might be a little less but there are alternatives.

"88% of all buyers financed their homes last year and consistent with previous years, younger buyers were more likely to finance their home purchase.  In 2018, the median down payment was 13% for all buyers, 7% for first-time buyers and 16% for repeat buyers." Stated by the 2018 NAR Profile of Buyers and Sellers.

Qualified Veterans are eligible for zero down payment, 100% mortgage loans without mortgage insurance.
Conventional loans are available with as little as 3-5% down payments.
FHA mortgages have a 3.5% down payment.
USDA mortgages for rural housing have two major products: one does not require a down payment and the other has a 3% down payment. Maps, based on population numbers, are available to determine if the area you're interested in purchasing in is eligible for a USDA mortgage.

We've come to believe that facts can be instantly verified by searching on the Internet. Unfortunately, there are a lot of things on the Internet that are questionable and certainly, that includes some information on mortgages. Specifically, some loans are not available in certain areas and to a particular persons based on their income and credit history.

The best approach, when it comes to buying a home, is to get the facts from a knowledgeable and trusted loan professional before you begin the home search process. Contact me at for a recommendation.

A website may not provide relevant information for your individual situation. Purchasing a home is a large investment and taking the time to find out the facts is worth the effort.

Is a Home Equity Loan an Option?

1/28/2019

Here's the scenario: you have a project and need to borrow some money, but you want to do it in the most economic manner.  You've got a low rate on your existing first mortgage and don't want to do a cash-out refinance and pay a higher rate.  Is a home equity loan an option?

Prior to 2018, homeowners could have up to $100,000 of home equity debt and deduct the interest on their personal tax return.  The Tax Cuts and Jobs Act of 2017 eliminated the home equity deduction unless the money is used for capital improvements.

Regardless of the deductibility, lenders will still loan money to owners who have equity in their home and good credit.  The most common reasons people borrow against their home equity are:

Consolidate debt with higher interest rates
Make improvements on their home
Refinance an existing home equity line of credit
Down payment for another home or rental investment
Creating reserves or available access for potential needs

One available loan is a fixed-rate home equity loan, commonly referred to as a second mortgage.  It is usually funded at one time, with amortized payments for terms that could range from five to fifteen years.

Another option is a home equity line of credit or HELOC, where a homeowner is approved for up to a certain amount at a floating-rate over a ten-year period.  The borrower can draw against the amount as needed and would pay interest every month and eventually, pay down the principal.

The amount of money that can be borrowed is determined by the equity.  Lenders generally will not exceed 80% of the value of the home.  If a home was worth $400,000, the 80% ceiling would be $320,000.  If the homeowner had an unpaid balance on their first loan of $240,000, an amount up to $80,000 would be possible.

The next variable is the borrowers' credit score which will determine the rate of interest that will be charged.  The higher the score, the lower the rate the borrower will pay.  And the converse is true, the lower the score, the higher the rate.

Another common variable considered is the borrowers' total debt to income ratio.  Ideally, the combination of regular monthly debt payments should not exceed 43% of their monthly gross income.

If you have good credit and an adequate amount of equity, your home could be the source of the funds you need.  There is a lot of competition among lenders and shopping around can make a difference.

Call us at for a recommendation of a trusted mortgage professional. If you have questions about whether the interest on the loan will be deductible, talk to your tax professional.

Standard or Itemized Deductions

1/14/2019

The Tax Cuts and Jobs Act of 2017 increased the standard deduction to $24,000 for married couples.  There will be some instances that homeowners may be better off taking the standard deduction than itemizing their deductions.  In the past, homeowners would most likely be better off itemizing but the $10,000 limit of state and local taxes (SALT) adds one more issue to consider.

Let's look at a hypothetical homeowner to see how a strategy that has been around for years could benefit them now even though they haven't used it in the past.  The strategy is called bunching; by timing the payments in a tax year so that they can be combined to make a larger deduction.

Let's say that the married couple filing jointly has a $285,000 mortgage at 5% for 30 years that has about $14,000 in interest being paid.  The property taxes are $6,000 and they have $4,000 a year in charitable contributions for a total of $24,000 of allowable itemized deductions on Schedule A.

Since that deduction amount is the same as the Standard Deduction, there is no monetary advantage one way or the other. However, if the taxpayers were to pay their interest because they must make timely house payments but only pay $2,000 of the 2018 property taxes in December of 2018 and the balance of the $4,000 in January, they transfer part of the deduction into 2019.

Additionally, if they make their intended charitable contribution for 2018 in January of 2019, it makes that deductible on the 2019 return.

Since the total deductible amounts paid out in 2018 was $16,000, the taxpayers would have an $8,000 benefit that year from taking the Standard Deduction.

Assuming they made the same $4,000 charitable contribution in 2019 during the year and paid the house payment and property taxes on time, their total deductions for 2019 would be $32,000 which is $8,000 more than the Standard Deduction.

In this example, the taxpayers in 2018 and 2019, would benefit a total of $16,000 in tax deductions by bunching and electing to take the standard deduction one year and itemizing the next.

This is only an example but if your situation is similar, it might benefit you to consider an alternative when to take the standard deduction and when to itemize. This is a conversation you need to have with your tax professional to see if it would work for you.

Eliminate FHA Mortgage Insurance

1/7/2019

Mortgage insurance premium can add almost $200 to the payment on a $265,000 FHA mortgage.  The decision to get an FHA loan may have been the lower down payment requirement or the lower credit score levels, but now that you have the loan, is it possible to eliminate it?

Mortgage Insurance Premium protects lenders in case of a borrower's default and is required on FHA loans.  The Up-Front MIP is currently 1.75% of the base loan amount and paid at the time of closing.  Annual MIP for loans with greater than 95% loan-to-value is .85% per year.

For loans with FHA case numbers assigned before June 3, 2013, when the loan is paid down to 78% of the original loan amount, the MIP can be cancelled.  The borrower may need to contact the current servicer.

However, for loans greater than 90% with FHA case numbers assigned on or after that date, the MIP is required for the term of the loan.

Most homeowners with FHA mortgages are not eligible to cancel the MIP because they either originated their loan after June 3, 2013, put less than 10% down payment and/or got a 30-year loan.  If they have at least 20% equity in the home, they can refinance the home with an 80% conventional loan which in most cases, does not require mortgage insurance.

With normal amortization on a 30-year loan, it takes approximately 11-years to reduce the original loan to the 78-80% requirement based on normal amortization.  There is another dynamic involved which is the appreciation on the home.  As the home goes up in value and the unpaid balance goes down, the equity increases.

If the homeowners believe that they have enough equity that would eliminate the need for mortgage insurance, they can investigate refinancing with a conventional loan.  Borrowers refinancing will incur expenses in starting a new mortgage and the interest rate may be higher than the existing rate.  Analysis will determine how long it will take to recapture the cost of refinancing.

Call me as for a recommendation of a trusted mortgage professional.

Year End Tax Newsletter

12/31/2018

One of the first steps in a good outcome is knowing a little bit about what you're about to undertake.  By being aware of some of the areas regarding homes that may not come up every year in a tax return, you'll be able to point them out to your tax professional or seek more information from IRS.gov.

Look through this list of items for things that could affect your tax return.  Even if you have relied on the same tax professional for years to look out for your best interests, they need to be aware that there could be something different in this year's return.

If you bought a home for a principal residence last year, check your closing statement and identify any points or pre-paid interest that you or the seller paid based on the mortgage you received.  These can be deducted on your Schedule A as qualified home interest if you itemize your deductions.  See Home Mortgage Interest Deduction | IRS Publication 936(2018 version not released as of this newsletter).

Keep track of all money you spend on your home that might be considered a capital improvement.  Get in the habit of putting receipts for money spent on your home that is not the house payment or utility bills.  Repairs are not tax deductible but improvements, even small ones, can be added to the basis of your home which can lower the gain when the home is sold.  Years from now, your tax preparer can sift through them and determine whether they're capital improvements or maintenance. See Increases to Basis | IRS Publication 523 Selling Your Home (2018 version not released as of this newsletter).

By making additional principal contributions with your mortgage payment, you'll save interest, build equity and shorten the term of a fixed-rate mortgage. See Equity Accelerator.

If you sold a home last year, the payoff on your old mortgage included interest from the last payment you made to the date of the payoff. That interest is tax deductible. You may need a breakdown of the payoff to the mortgage company; you should be able to get that from your closing officer.

If you refinanced your home, unlike a home purchase, points paid to refinance are not deductible as interest in the year paid; they must spread ratably over the life of the mortgage. See Home Mortgage Interest Deduction | IRS Publication 936 (2018 version not released as of this newsletter).

For homeowners who have lost a spouse, there is an exception regarding the exclusion on the sale of a principal residence.  If the surviving spouse concludes a sale of the home within two years of the death of their spouse, they may exclude up to $500,000, instead of $250,000 for single taxpayers, of gain provided ownership and use tests are met prior to death.

The two-year period begins on the date of death and ends two years after that date.  See Sale of Main Home by Surviving Spouse | IRS Publication 523 Selling Your Home(2018 version not released as of this newsletter).

There could be significant tax consequences to a person selling a home that was received as a gift as compared to receiving the home through inheritance. With a gift, the basis of the donor becomes the basis of the donee. With inheritance, the heir usually gets a stepped-up basis and avoids potential unrecognized gain.  See Home Received as Inheritance | IRS Publication 523 Selling Your Home (2018 version not released as of this newsletter).
Click here to download a Homeowners Tax Guide.  This is meant for information purposes only and advice from a qualified tax professional should be sought to find out about your individual situation.

Your Real Estate Resource

12/24/2018

Being a better homeowner is a full-time job. It's not just about making better decisions when you buy and sell; it's making better decisions throughout the time you own the home.

It takes good information to make good decisions. Think of times when you need advice on financing, taxes, insurance, maintenance, finding reasonable and reliable contractors and lots of other things. Imagine how nice it would be to have a real estate information line you could call whenever you have a question.

During the purchase or sale, the obvious place to get real estate answers is your agent but where do you go the rest of the time? Since homeowners are now staying in their homes for ten to twelve years or more, they need a reliable resource for good information and advice.

Our objective is to move from a single purchase or sale to customers for life; a select group of our friends and past customers who consider us their lifelong real estate professional. We believe that if we help you and your friends with all their real estate needs not just when they buy or sell but for all the years in between, we can earn the privilege to be your real estate professional.

Throughout the year, we'll send reminders and suggestions by email and social media that enhance your homeowner experience. When we find good articles to help you be a better homeowner, we'll pass them along. You'll discover new ways to maintain your property, minimize expenses and manage debt and risk.

We want to be your "Go-To" person for everything to do with real estate. If you have a question, please call us at . If we don't have the answer, we'll find it for you or at least, point you in the right direction.

We're here for you and your friends...now and in the future. Please let us know how we can help you.

Another Type of Financing Concession

12/10/2018

Price, condition and terms are factors that any owner must consider when marketing their home.  Price is usually the easiest to adjust to compensate for shortcomings in location or condition of the home.  Improving the condition of the property is more time consuming but updates to kitchens, baths and other things can appeal to a buyer.

One of the most overlooked marketing factors are terms which are also referred to as financing concessions.

Paying part or all a buyer's closing costs is the most common financing concession.  By doing so, the buyer doesn't need as much cash to get into the home which can be attractive to more buyers.

There is another financing concession that is not used very often in today's market but it is still allowed and can increase the marketability of a home. A temporary buy-down of the interest rate makes a lower payment for an initial period.

It is still a fixed-rate mortgage that the buyer must qualify for at the note rate and there is no negative amortization.  The seller pre-pays the interest in advance at closing so the buyer has lower payments in the initial period.

Instead of lowering the price of the home, let's say the seller has decided to offer $6,875 worth of financing concessions that the buyer can apply any way they want.  One way might be to get a 2/1 buy-down which means that the first year, the payment would be based on 2% less than the note rate of the mortgage and the second year, it would be 1% less than the note rate.  The third through thirtieth years, the payment would be the actual note rate.

On a $275,000 home with a 3.5% down payment at 5% for 30 years, the first year's mortgage payment would be figured at 3% which would be $305.76 less than normal.  The second year's payment would be figured at 4% and would be $157.65 less than normal.  The third through thirtieth years, the payment would be the normal payment of $1,424.59.

It would save the buyer $5,560.90 in interest in the first two years and there would still be $1,314 of the financing concession to apply toward the buyer's closing costs.

The financing concessions paid by the seller give the buyer lower payments for the first two years and less money needed for the closing cost. An added bonus for the buyer is that the buyer can deduct the pre-paid interest the seller paid as qualified mortgage interest.

Some lenders may tell you that temporary buy downs cannot be done. They've been around for over thirty years and can still be done today on FHA, VA and conventional loans. Call if you need a recommendation of a trusted mortgage professional or check out a 2/1 Buydown with your own numbers.

Gift of Equity

11/26/2018

There is a little-known mortgage program that could provide the vehicle for the right person to get into a home.  If a person sells their home to another for less than the fair market value, the difference in the appraised value and the sales price is considered a gift of equity for the buyer.

FHA requires that borrowers receive gifts of equity only from family members transferring title to the borrower.

An appraisal is required to determine the value of the home.  The sales price is subtracted from the appraised value to determine the equity to be gifted.  If a home appraises for $300,000 when the owner will sell it for $250,000, the gift is $50,000.

The gift is applied to the down payment.  In this example, the borrower would have to qualify for a $250,000 mortgage which would require private mortgage insurance because a 20% down payment on a $300,000 home would be $60,000.  If the buyer had an additional $10,000 in cash to put down, the PMI would not be required, and the monthly payments would be lower.

The seller would need to provide a gift letter stating the amount of the gift, the date the gift, and that no repayment is expected or required.  It also needs to have the donor's name, address, phone, email and relationship to the buyer.  In addition, the settlement statement will need to show the gift being credited from the seller to the buyer.  The lender may require additional documentation.

Beginning in 2018, the annual gift tax exemption is increased to $15,000 per person per year and lifetime exemption to $5.6 million.  The fact that the $50,000 exceeds the individual amount doesn't mean there will necessarily be any gift tax due now.  The seller should consult their tax professional.

Do You Know the Way?

11/19/2018

It may be natural for first-time buyers to be unsure of the process of buying a home because they haven't been through it before but even repeat buyers need to know changes that have taken place since the financial housing crisis.

The steps in the home buying process are predictable and generally follow the same pattern. It certainly makes the move stay on schedule when you know all the different things that must be done to get to the closing.

In the initial interview with your real estate professional, you share the things you want and need in a home, discuss available financing and learn how your agent can represent you in the transaction.
The pre-approval step is essential for anyone using a mortgage to purchase a home to assure that they're looking at the right price of homes and so they'll know what they can qualify for and what the interest will be.
Even with lower than normal inventory, it is difficult to stay up-to-date with the homes currently for sale and the new one just coming on the market. Technology has simplified this process, but the buyer needs to implement them.
Showings can be accommodated online through virtual tours, drive-bys and finally, a personal tour through the home. Your real estate professional can work with you to see all the homes in the market through REALTORS?, builders or for sale by owners.
When a home has been identified, an offer is written and negotiation over price, condition and terms takes place.
A contract is a fully negotiated, written agreement.
Escrow is opened to deposit the earnest money from the buyer as a sign they're acting in good faith. The title search is also started so that clear title can be conveyed from the seller to the buyer and that the lender will have a valid lien on the property.
88% of home sales involve a mortgage. The lender will require an appraisal to be sure that the home can serve as partial collateral for the loan. If the buyer has been pre-approved, the verifications will be updated to be certain that they're still valid. The entire loan package when completed, is sent to underwriting for final approval.
When the contract is completed, at the same time the title search and mortgage approval is being worked on, the buyer will arrange for any inspections that were called for in the contract.
After all contingencies have been completed, the transaction goes to settlement where all of the necessary papers are signed, and the balance of the buyer's money is paid. This is where title transfers from the seller to the buyer.
Possession occurs according to the sales contract.

One of the responsibilities of your real estate professional is to make sure that things are done in a timely manner so that the transaction will close according to the agreement on time and without unforeseen or unnecessary problems.

Even if you're not ready to buy or start looking yet, you need to be assembling your team of professionals. Let us know and we'll send you our recommendations, so you can read about them on their websites.

If you have any questions, call us at 208.946.7816, we're happy to help. Informed buyers lead to satisfied homeowners and that is better for everyone involved.

Start Early and Live Happily Ever-after

11/12/2018

As storybooks go, the character is introduced, they meet their love interest, a villain thwarts their intentions, true love overcomes, they marry and live happily ever-after. It's a very familiar formula.

Similarly, there is a formula that couples follow in real life. They go to college, get a good job, rent a home, fall in love, get married and buy a starter home. They start a family, move into a larger home, save for their children's education, start planning for their retirement and if they live within their means, they invest their surplus funds.

An alternative to this might be to start investing in rental homes early in their adult life before their standard of living becomes so expensive that they don't feel like they have the money to purchase rentals.  There are infinite possibilities but let's say a single person, after getting a good job, buys a small three or four-bedroom home with an owner-occupied, minimum down payment.  They move into the home and possibly, rent out the bedrooms to other singles who need a place to live.

At some point, they decide to buy another home to live in with a minimum down payment and either rent out their bedroom in the first home or rent the whole home to a tenant.  And they repeat the process again with the second home.

This could continue until they acquired several homes.  Let's say, that in the meantime, they have met their love interest, decide to get married and together, they buy a starter home for them to live in.

This concept advances the investment in rental homes from the latter part of their lives to the early part of their life.  The early investment gives them more time for appreciation and wealth accumulation.  A simple principle of investing is that sooner is better than later.  By delaying gratification to own your "dream home" early, a person may be able to accumulate more net worth in the same period of time.

Buying a property initially as owner-occupied permits a lower down payment of 3.5% compared to a typical down payment for non-owner-occupied properties is 20%.  By using more borrowed funds, leverage can increase the yield on the investment.

It may be too late for some people reading this article to adopt this strategy but if they have kids in college, it may be something for them to consider.

221 E Sherman Ave
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200 Main St
Sandpoint, Idaho 83864

Tomlinson Sotheby's International Realty

Josh Ivey (208) 946-7355
josh.ivey@sothebysrealty.com

Jennifer Ivey (208) 946-7816
jennifer.ivey@sothebysrealty.com

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Photo used under Creative Commons from Mary P Madigan