Homeowner Tax Benefits

There are many reasons for wanting to have a home of your own like a place to raise your family, share with friends and feel safe and secure.  While investment opportunities rank high for most people based on the fact that homeowners’ net worth is over forty times higher than that of renters, so do the tax benefits that reduce tax liability.

• Taxpayers who have owned and used a home for at least two out of the last five years, can exclude a maximum of $250,000 of gain as a single taxpayer and up to $500,000 of gain for married taxpayers filing jointly.
• If the gain on a principal residence exceeds the allowed exclusion, the balance is taxed at the lower long-term capital gains rate rather than the marginal tax rate of the homeowner.
• Homeowners can deduct the interest paid on up to $1,000,000 of acquisition debt used to buy, build or improve their first or second home.  They may also deduct the interest on up to $100,000 over acquisition debt that is a recorded lien on their first or second home.
• IRS will allow taxpayers to decide each year whether to take the higher of the itemized deductions or the standard deduction.
• Points paid on new loans for home purchases are considered interest and can be deducted in the year paid. On the other hand, points paid for refinancing a home must be amortized over the life of the mortgage.

For more information, talk to your tax professional and see IRS publication 523 and IRS Publication 936.

ICE Can Save Lives

Everyone knows that ice can make a drink cool or reduce swelling, but if you put it on your cell phone, it might just save your life.

The concept is simple.  Make a contact record in your address book with the name “ICE”, which stands for In Case of Emergency.  In the note section of the record, you would list your name, blood type and medical conditions along with prescriptions and physicians.  You’d also list the people and their phone numbers that can be contacted in case of an emergency.

Several years ago, a British first responder came up with the idea when his emergency unit responded to a call where the victim was unable to communicate due to illness or trauma.  The victim’s wallet didn’t indicate specific persons to be notified in an emergency.  The fireman went through his cell phone to try to identify a relative and wasn’t successful.

That’s when he came up with the idea of a universal entry into the address book for ICE where the necessary parties and special information could be kept.  The story received a considerable amount of publicity and spread across the pond to the United States and into many other countries.

While it isn’t recognized everywhere, it is becoming increasingly more popular.  Even if emergency technicians didn’t find it, the slight possibility that they would find it and it would make a difference would justify the few minutes it will take to create it.  Click here to download a card to carry in your wallet or purse.

Don't Consider Appreciation or Tax Savings

Appreciation and tax savings are legitimate contributors to an overall rate of return on rental real estate but what if you didn’t consider them at all.  If you only looked at one or two, very conservative measurements, you might decide to invest especially knowing that there are more benefits that will accrue to your investment.

If we bought a property for cash, collected the rent and paid the expenses, the amount left would be called Net Operating Income.  In the example below, if would generate $7,200 a year which would be a 7.02% cash on cash rate of return which is considerably higher than the current 10 year treasury rate of around 2.3%.

If we place a mortgage on that property, the rate of return actually increases due to leverage.  After the principal and interest are paid, the net operating income obviously decreases but the cash on cash rate of return increases to 9.10% because the borrowed funds means less cash invested.

Another contribution to the investment’s rate of return occurs with the mortgage due to amortization: the principal reduces with each payment made which increase the investor’s equity.  In this example, the equity build-up divided by the initial investment yields a 5.25% rate of return in the first year.

Single family homes for rental purposes offer the investor high loan-to-value mortgages at fixed interest rates for long terms on appreciating assets with tax benefits, reasonable control and an opportunity to earn higher than normal rates of return.  Call if you'd like to talk about what kind of rental opportunities are available.

Being a Good Neighbor

A good neighbor might be characterized as someone who’ll look after your home when you’re out of town by picking up your mail and watering your plants.  You’d most likely reciprocate for anyone who’d be so generous toward you.

In some cases, you might only be able to name one or two of your neighbors who would step up to that level of service.   Wouldn’t it be nice if more people on your street would be happy to make that offer?

The solution may just start with being a better neighbor first.  The following suggestions go a long way to improving your neighborhood and making new friends at the same time.

• Meet your neighbors and exchange phone numbers and email addresses.  Agree with each other that you’ll let them know if you see something strange going on at their home. 
• Slow down when driving through the neighborhood; it will make it safer and everyone will appreciate it. 
• Control your dog: keep it on a leash; pick up after it; don’t let it bark too much.
• Don’t park in front of your neighbor’s home.
• Notify your immediate neighbors when you’re having remodeling done and ask them to let you know if any of the contractors cause damage to their property.
• Let your neighbors know when you’re having a party and that there will be more cars on the street than usual.
• Maintain your home and yard so that it adds to the beauty of the neighborhood.
• Put your garbage out for collection on the correct day and bring the containers back in promptly.

In reality, it is fairly obvious; you just have to think of the things that you’d want from your neighbors.  Be friendly; don’t be noisy; offer a helping hand when available and respect each other’s boundaries.  Having a sense of community and that you all share the neighborhood can be underlying principles that will guide your behavior.

A good neighbor would be aware of suspicious activity and would call their neighbors and the police if warranted.  This might be something you can discuss with your neighbors.  Click here for a template to record your immediate neighbor’s contact information and keep readily available if needed.

Holiday Tree Safety

Fresh holiday trees are beautiful, smell great and really add to the spirit of the season.  Following some proven safety tips might help you avoid a disaster and keep the Grinch away.

• Select a tree with fresh green needles that don’t fall off when touched or when the trunk is tapped on the ground.
• When trees are cut too early, they have a greater risk of drying out and can become more dangerous especially with electrical lights.
• Cut 1” to 2” off the base of the tree before placing it in the stand to facilitate it drawing water to the limbs and quills.
• Trees require water similar to cut flowers or they’ll dry out. Tree stands should hold at least one gallon of water and it should be checked every day.  A six foot tree could use up to a gallon of water every two days.
• Position the tree a minimum of three feet or further from heat source like fireplaces, space heaters, heat vents or candles.  Do not allow the tree to block an exit.
• Lights should be labeled from an independent testing laboratory and intended for indoor use.
• Follow manufacturer’s recommendations for how many strings of lights can be connected to each other.
• Turn off all tree lights when you go to bed or leave the home.
• If the tree becomes dry and begins shedding needles, it can be a fire hazard and should be removed from the home.  Even if the holidays are not over, it is not worth the risk to keep it in your home.
• After the gifts have been opened, don’t return the paper and boxes under the tree.
• Remove the tree as soon as possible after the holidays.
• Trees should never be burned in a fireplace.  The trees will burn very hot and quickly when they are dry and could spread outside of the fireplace which could cause an unfriendly fire.
• Check to see if there is a recycling program for holiday trees in your community.

The National Fire Protection Association reports that “one of every three home Christmas tree fires are caused by electrical failures and a heat source too close to the tree causes roughly one in every six of the fires.”

Verify with Your Lender

If you have a mortgage with an escrow account to pay your property taxes and insurance, you expect the company servicing your loan to pay this year’s taxes this year so that you can deduct them on your 2014 income tax return.  After all, your monthly payment includes 1/12 the annual amount so there will be money available for them to be paid on time.

IRS requires that expenses must actually be paid in the year that a deduction is to be taken.

The predicament occurs when you’ve made your payments but the mortgage company didn’t pay the taxing authority in the tax year they were due.  If they paid your 2014 taxes in January of 2015, they wouldn’t be deductible for you until you file your 2015 income tax return.

Verify with your lender after you make the December payment that they did indeed pay your property taxes.  The question for your lender’s customer service is: "Have you or will you pay the 2014 property taxes this year so I’m eligible to deduct them on my 2014 income tax return?”

Consider an Adjustable Rate

With fixed rate mortgages as low as they are, most purchasers or owners wanting to refinance might not even consider an adjustable rate loan.  The determining factor should be how long the person plans to be in the home and which mortgage will provide the cheapest cost of housing.

For instance, if you compare a $300,000, 30 year term mortgage with a 4.125% rate on the fixed and a 3.25% on the 5/1 adjustable, the breakeven point would be almost seven years assuming the rates adjusted the maximum that they could in each year.

 

Therefore, if a person is going to stay in the house less than 7 years, the ARM would provide the cheapest cost of housing.  This example shows that at the end of five years, the ARM would generate almost $13,000 savings over the fixed-rate. 

On the other hand, this could be a good time for homeowners with an existing adjustable rate mortgage to consider refinancing into a fixed-rate mortgage.  The longer that they intend to stay in their home, the more advantageous it might be for them to convert their mortgage to lock-in their payment and fix their housing costs.

A trusted mortgage professional can analyze the alternatives to provide you with the information necessary to make a good decision.  You can try the Adjustable Rate Comparison with your own numbers to see the effect.

Realize Tax Savings Sooner

A homeowner’s tax saving benefit is generally realized when they file their federal income tax return after the money has been spent for the interest and property taxes.  Some people look forward to the refund as a means of forced savings but some people need to realize the savings during the year.

It is possible to adjust the deductions being withheld from the homeowner’s salary so they realize the benefit of the savings prior to filing their tax returns in the form of more money in their pay checks.  Employees would talk to their employers about increasing their deductions stated on their W-4 form.

By increasing the exemptions or deductions, less is taken out of the check and the employee will receive more in each pay check.  If a person over-estimates their exemptions and therefore, underpays their income tax, they might incur interest and would have additional tax to pay when they filed their tax return.

Buyers considering this strategy should seek tax advice and discuss it with their human relations department at work.   Additional information is available on the Internal Revenue Service website about Completing Form w-4 and Worksheets.

What if Your Teenager Doesn’t Want to Move To Your New [City] Home?

What if Your Teenager Doesn’t Want to Move To Your New [City] Home?

Talking Points with an Agent

A list of talking points can be very valuable to guide the conversation with an agent that will lead to a decision to have him or her represent you in the sale of your home.  If you haven’t been through the process before or it has been a while, the answers to these questions can reveal things about the experience and where-with-all of your candidate.

Even if you only intend to interview one agent and maybe they are a trusted friend, it is appropriate to understand how different issues will be handled.  Professionals should not feel challenged to discuss these important concerns.

1. Tell me about your experience and training.

2. Do you work real estate full-time?

3. Are you a REALTOR® and a member of MLS?

4. What is the average price of the homes you have sold and how many did you sell last year?

5. Which neighborhoods do you primarily work?

6. How many homes have you sold in my neighborhood?

7. What is your list price to sales price ratio?

8. How many buyers and sellers are you currently working with?

9. Tell me about the positives and negatives of my home?

10. Describe your marketing plan for my home and if you will use outside professionals.

11. Specifically address Internet exposure, open houses and showings.

12. Describe how you’ll keep me informed all along the way.

13. Will I work directly with you or with team members?

14. Can you provide me with three recent references?

You might have noticed that price was not in the list of talking points.  The seller sets the price but the market and the buyer determine the value.  The agent can advise you about the proper range that will insure activity and ultimately affect your final proceeds.  The advice should be based on facts that are available to all agents as well as the prospective buyers and the appraisers.

The decision to list a home with a particular agent and company should never be based on the listing price suggested by the prospective agent.

Relax...There's an Alternative

Is the stock market keeping you up at night?  Are you consuming more antacids than ever before?  Are the ups and downs causing more stress than you want or need?  There is a simple alternative in rental real estate.

Single family homes for rental purposes offer an excellent rate of return in an investment that most people understand better than other investments.  The concept is simple: stay with predominantly owner-occupied homes in a slightly below average price range.  In most areas, tenants are easy to find and they’ll usually stay two to three years or more.

For the person who doesn’t want to be bothered with calls from tenants, professional management is available and commonly won’t dramatically affect the rate of return.  Managers can achieve economies of scale that individuals can’t due to managing multiple properties and having good connections with the best workmen.

Unlike most commercial property, single family homes are much more liquid because of the higher demand for residential property.  Single family homes offer the investor the opportunity to borrow high loan-to-value mortgages at fixed interest rates, for long periods of time on appreciating assets with tax advantages while providing the investor a higher than normal level of control.

Spend an hour investigating the benefits and you might sleep better at night, eat less antacids and find yourself more mellow than you’ve been in years.

Save Interest, Build Equity & Shorten the Term

If you invest in a savings account, you’ll make less than 1% and would have to pay income tax on the earnings. On the other hand, contribute something extra to your house payment and you’ll earn at the mortgage interest rate which is certain to be more than you are earning in the bank.

Making additional principal contributions on your mortgage will save interest, build equity and shorten the term. An extra $100 a month in the example shown will save thousands in interest and shorten the term of the mortgage as well.

Reducing your cost of housing is another way to improve the investment in your home. Becoming debt free is a worthy goal that is achieved with discipline and good decisions. Suggestions like this are part of my commitment to help people be better homeowners when they buy, sell and all the years in between.

Check out what would happen if you were to make additional payments on your mortgage.

Enjoy Your Improvements and Profit by Them

Homeowners can raise the basis or cost in their home by money spent on capital improvements. The benefit is that it will lower their gain and may save them taxes when they sell their home.

Improvements must add value to your home, prolong its useful life or adapt it to new uses. Repairs are routine in nature to maintain the value and keep the property in an ordinary, operating condition.

Additions of decks, pools, fences and landscaping add value to a home as well as new floor covering, counter-tops and other updates. Replacing a roof, appliances or heating and cooling systems would be considered to extend the useful life of the home. Completing an unfinished basement or converting a garage to living space are common examples of adapting a portion of the home to a new use.

Other items that can raise the basis in your home are special assessments for local improvements like sidewalks or curbs and money spent to restore damage from casualty losses not covered by insurance.

Here’s a simple idea that could save you money years from now.

Every time you spend money on your home other than the house payment and the utilities, put the receipt or canceled check in an envelope labeled “Home Improvements.” Regardless of whether you know if the money would be classified as maintenance or improvements, the receipt or cancelled check goes in the envelope.

Years from now, when you’ve sold your home and you need to report the gain on the property, you or your accountant can go through the envelope and determine which of the expenditures will be adjustments to your basis.

Some people disregard this idea because of the generous exclusion allowed on principal residences. At the unknown point in the future when you sell your home, circumstances may have changed and the proof of these expenditures will be valuable. The tax laws could lower the exclusion amount or eliminate it altogether. Your marital status may change because of death or divorce. The market value of your home may skyrocket.

Since the future is unknown, it is better to keep track of the improvements as they are made and how much is spent on them. Download an Improvement Register and examples or read more in Publication 523 on Increases to Basis.

Opportunity Costs

Sometimes, there are costs associated with not taking a particular action.  If a person left their money in a certificate of deposit earning 2% when they could have made an investment that earned 8%, the difference is the opportunity costs associated to not taking action.

If a couple has a down payment and good credit, locking in a low interest rate mortgage for 30 years could easily provide their lowest cost of housing.  If that couple waits three years to purchase a home, the price would probably be higher as would the mortgage rate.

However, assuming the price and interest rate remained constant, look at what the opportunity costs might be compared to doing nothing.

If their money was invested in a certificate of deposit at 2.00%, in two years their $8,750 would have grown to $9,104.  They would have earned $354 and had to pay ordinary income tax on the interest.

If their money was invested in the stock market that had increased 7%, in two years they would have a profit of $1,268 which would be subject to long-term capital gains tax.

On the other hand, it the same investment was used to buy a home that increased in value at 3% annually, the equity would be $31,938 or an increase of $23,188. Tax would not be triggered until the home is sold and may not be due then based on their homeowner’s principal residence exclusion.

The home goes up in value due to appreciation and the unpaid balance goes down because of amortization.  The dramatic difference in growth in the equity of the home is effected by leverage: the use of borrowed funds controlling the asset.

A home is a place of your own where you can feel safe and secure, to enjoy with your family and friends and in many instances, a very good investment.  It is difficult to measure the opportunity costs of intangibles but not necessarily money.

Make your own projections with Your Best Investment.

 

Crafting an Acceptable Offer

An agent was presenting a contract to a single, senior woman who was moving into a retirement home.  It was a full price offer with reasonable terms and timelines but the seller wouldn’t accept it.  When the agent probed deeper, she discovered that the seller was concerned with her dining room table.

It had been the first piece of nice furniture that she and her husband had purchased and they had literally spent a lifetime celebrating and making decisions at that table.  It troubled the owner to think that the table would go to strangers who might not appreciate it as much as her family had.

The agent told the elderly seller that she knew of a church nearby that had a community room filled with lovely tables like hers.  If she liked the idea, the agent would call the church to see if they’d like to have it.  Once a new home for the table was found, the sale of the home went smoothly.

Lower inventory and increased demand in certain price ranges have increased the frequency of multiple offers on the same home.  Sellers are frequently faced with a decision dilemma on which offer to accept and the price may not be the most important factor.

Sellers generally need the equity from the sale of their home to purchase another one but they also don’t want to have to temporarily move if they’re not able to get into the home they’re purchasing.  Flexible buyers have discovered the value in coordinating the sale and possession of the homes.

Sellers want to know when they make a decision on an offer, that the buyers will be able to perform as the contract is written.  The more contingencies that can be eliminated or minimized, the more comfortable a seller will feel about the certainty that it will close according to schedule.

The buyer should be pre-approved with all verifications and credit reports having been done.  Simply having a loan officer’s opinion is definitely not the same thing as a pre-approval.

There is a unique dynamic to every transaction because the parties are individuals with infinite priorities and values.  The art of the deal takes place when these unique variables are considered to define a mutually acceptable offer involving price, terms and conditions. The role and experience of the agents contribute to the successful outcome.

Seller Safety Plan

September is REALTOR® Safety month when special attention is focused on the security of having a home on the market and the concerns for the well-being of owners is a day-to-day effort.  The following list may help sellers secure their home and minimize risk.

• Locks – doors and windows should be locked at all times.  Additional locks like deadbolts or safety locks can provide a higher level of security.
• Home lighting - turn on the lights prior to purchasers arriving to improve the showing.  Not only will they be able to see things better, it could prevent them hurting themselves unnecessarily. Outdoor motion-sensor lights provide additional security.
• Eliminate the possible hazards – try to identify anything that might cause a person to trip and fall such as loose objects on the floor or floor coverings that aren’t properly secured.
• Security system – If you have a security system, it should be monitored and armed, especially when you’re away from home.  Most systems will allow you to program a temporary code that agents will be able to use based on your instructions. 
• Prescription medications – remove or secure the drugs before showing the home.   
• Secure valuables – jewelry, artwork, gaming systems;  mail containing personal information like bank and credit card statements, investment reports;  wine and liquor can also be a security issue.
• Remove family photos –pictures can be distracting to prospective purchasers but the concern at hand is to eliminate photos of a wife, teenage daughter or children that might provide information to a possible pedophile or stalker who could be posing as a buyer.
• Remove weapons – the reason to remove guns should be obvious to everyone but a knife block on the kitchen counter can become an opportunity of convenience.
• Unexpected callers - when some people see a for sale sign in the yard, they think that it’s an invitation to look at the home immediately. Keep your doors locked so that people can’t let themselves in. If they ring the doorbell and want to see the home but aren’t accompanied by an agent, ask them to call your listing agent.

These precautions should be taken before the photos or virtual tours are made.  Having these items in plain sight in the pictures posted on the Internet can unwillingly provide prospective criminals with a menu of what is available.

Agents cannot protect a seller’s valuables other than to inform the owner of potential threats to their security.  In most cases, the seller’s agent will not be present at home showings and even if they were, it is not always practical nor desirable to follow the buyers and their agent through the home.

Annual Maintenance

A common expectation of homeowners is to want the components and systems in their home to work when they need them. Periodic maintenance is just as important as having a trusted service provider to make necessary repairs.

Victims of Murphy’s Law can attest that their air conditioner goes out on the hottest day of the year or the water heater fails when you have out of town visitors.

If the convenience of having things work doesn’t justify maintaining your home’s systems, consider that it can be less expensive than the results of neglect causing repairs or replacement.

• Replace burned-out, dim or missing bulbs in light fixtures and lamps. Consider switching to LED bulbs.
• Dryer exhaust vents build up lint even though you may be cleaning the filter regularly.
• Fire extinguishers need to be recharged or replaced after expiration date.
• Establish a recurring appointment on your calendar to change filters in your HVAC.
• Replace missing or damaged caulk around sinks, bathtubs, showers, windows and other areas.
• Clean gutters.
• Schedule an inspection with a pest control a minimum of once a year unless you have a service contract.
• Schedule a chimney cleaning prior to using the fireplace for the first time in the season.
• Keep all tree branches and shrubs trimmed away from the home.
• Pressure wash exterior, deck, patio, sidewalks and driveway.
• Keep levels of insulation in the attic above your ceiling joists.
• Check appliances with water lines for leaks or worn hoses.
  • ice maker  • washing machine   • dishwasher   • others
• Test all GFI breakers and reset.
• Inspect all electrical outlets for broken receptacles, fire hazards or loose fitting plugs.
• Have furnace and air conditioner serviced annually.
• Test smoke and carbon monoxide detectors and change batteries.

The early fall is a great time to take care of these items before the weather becomes harsh.

Money Down the Drain

Private mortgage insurance is necessary for buyers who don’t have or choose not to put 20% or more down payment when they purchase a home.  It is required for high loan-to-value mortgages and it provides an opportunity for many people to get into a home who otherwise would not be able.

The problem is that it is expensive and a homeowner’s goal should be to eliminate it as soon as possible to lower their monthly payment and avoid putting good money down the drain.

FHA loans made after 6/1/13 that have 90% or higher loan-to-value at time of purchase have mortgage insurance premium for the life of the loan.   FHA loans made prior to 6/1/13, can have the MIP removed after five years and if the unpaid balance is 78% or less than the original loan-to-value.

VA loans do not require mortgage insurance.

Conventional loans, in most cases, with higher than 80% loan-to-value require mortgage insurance.  The cost of that insurance varies but with a $250,000 mortgage, it could easily be between $100 and $200 a month.

Your monthly mortgage statement should itemize what your monthly fee is for the mortgage insurance.   Unlike interest that is deductible, most homeowners are not able to deduct mortgage insurance premiums.

If you plan to remain in the home or to stay there for a considerable number of years, the solution may be to refinance the home.   If the home has increased since it was purchased, the loan-to-value at its new appraised value may not require PMI.  You might even be fortunate enough to obtain a lower rate than you currently have.

Cash Flow and Equity Build-up

Many years ago, Las Vegas hotels would entice customers with inexpensive rooms, meals and entertainment so they would gamble.  It may have worked initially but if you’ve been to Las Vegas recently, the bargains are gone.  Hotels expect each division to be a profit center on its own.  As a consumer, I might not like the changes but as an investor, I’d have to be pleased with increased profitability.

Years ago, real estate investors used to accept negative cash flow buoyed by tax incentives in hopes of making a big payday due to appreciation when they sold it.   Today’s investors are focusing on tangible, current results like cash flow and equity build-up.

Cash flow is the amount of money you have left over after collecting the rent and paying the expenses.  Since rents have gone up considerably due to supply and demand in the last few years and mortgage rates are at near record lows, income is up and expenses are down, making the cash flows attractive.

If the cash flow is sufficient, you could have a good investment even if the value of the property never increased.  Cash on Cash doesn’t consider appreciation and measures the cash flow before tax advantages by the initial investment.  A rental with $3,170 CFBT divided by an initial investment of $29,000 would generate a 10.93% Cash on Cash rate of return.

Low down payments on investor properties are also a thing of the past.  Non-owner occupied mortgage money is available but the investor should expect to put down 25-30%. An advantage of having a smaller mortgage is a lower payment.

Most mortgages are amortized loans with both principal and interest due with each payment.  The forced savings of the principal contribution builds equity in the property and can be considered a part of the rate of return.

A $100,000 mortgage at 4.5% for 30 years would have $1,613.29 applied to principal in the first year.  Divide that by the same $29,000 initial investment and the amortization would generate another 6%.

Without factoring in appreciation or tax advantages, this rental example generates much more than most alternative investments.  There certainly are many different aspects that affect the risk and return on rental investments.  If you haven’t scrutinized single-family rental opportunities in a while, you should look again.

Which Filter to Use?

A dirty air filter decreases the effectiveness of your HVAC system because it inhibits airflow and allows dirt, dust, pollen and other materials to blow through the system.

The challenge is how often it should be changed to keep the system working efficiently and extend the equipment life. Too often and you’re wasting money and not often enough and your increasing the operating and maintenance costs.

Fiberglass panel filters are inexpensive and easy to find but they’re not very efficient and they allow most dust to pass through. They were popular years ago but there are much better products available currently.

Pleated air filters are available in MERV ratings from 5 to 12. As these filters collect dirt and other particles, they become less efficient to the point of impacting air flow. Allergy sufferers can benefit from this type of filter. These should be changed every two to three months based on local conditions.

HEPA filters stand for High Efficiency Particulate Arrestance. They are very efficient and more expensive than previously described filters. Since they are very efficient, they require changing more frequently; possibly, every month.

Electrostatic air filters are permanent and washable. They generally cost more initially but the savings will be based on how long they last. This type does not add to landfill issues or produce ozone.

Improperly maintained filters will lower the quality of the air in the home, have a negative impact on air flow, cause it to use more electricity and eventually require maintenance to the systems.

In an attempt to easily comparing filters, a rating system was created called MERV, an acronym for Minimum Efficiency Reporting Value. The rating from 1 to 16 indicates the efficiency of a filter based on standards set by ASHRAE. Higher ratings indicate a greater percentage of particles are being captured in the filter.

To create a system to remind you when to change your filters, set a reminder on your electronic calendar to recur for whatever frequency you determine is best for you. Be sure to keep a supply of filters on hand to be ready to change them out when the time comes.

How's Your Memory?

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.

Reverse Mortgage

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.

How Was It Measured?

In an attempt to compare homes, one of the common denominators has been price per square foot.  It seems like a fairly, straight forward method but there are differences in the way homes are measured.

The first assumption that has to be made is that the comparable homes are similar in size, location, condition and amenities.  Obviously, a variance in any of these things affects the price per square foot which will not give you a fair comparison.

The second critical area is that the square footage is correct.  The three most common sources for the square footage are from the builder or original plans, an appraisal or the tax assessor.  The problem is that none of sources are infallible and errors can always be made.

Still another issue that causes confusion is what is included in measuring square footage.  It is commonly accepted to measure the outside of the dwelling but then, do you include porches and patios?  Do you give any value for the garage, storage or other areas that are not covered by air-conditioning?

Then, there’s the subject of basements.  Many local areas don’t include anything below the grade in the square footage calculation but almost everyone agrees that the finish of the basement area could add significant value to the property.

Accurate square footage matters because it is used to value homes that both buyers and sellers base their decisions upon.

Let’s say that an appraiser measures a home with 2,800 square feet and values it at $275,000 making the price per square foot to be $98.21.  If the assessor reports there are 2,650 square feet in the dwelling and the owner believes based on the builder, there is 2,975 square feet, you can see the challenge.

If the property sold for the $275,000, based on the assessor’s measurements, it sold for $103.77 per square foot and by the owner’s measurements, it sold for $92.44 per square foot. Depending on which price per square foot was used for a comparable, valuing another property with similar square footage could have a $30,000 difference.

The solution to the dilemma is to dig a little deeper into where the numbers come from and not to take the square footage at “face value”.  It is important to recognize that there are differences in the way square footage is handled.

The Reason They're Called Benefits

The Veterans Administration guarantees home loans for eligible veterans.  It is considered an attractive loan because the veteran can purchase the home with no down payment up to specific loan limits and no mortgage insurance. This makes the monthly payment considerably lower.

Let’s assume a buyer wants to purchase a $200,000 home and can get a 4.5% interest mortgage for 30 years.

A FHA loan would require a $7,000 down payment plus $3,377.50 in up-front MIP which can be rolled into the mortgage. The monthly mortgage insurance premium would be $221 per month for a total payment of $1,215.94.

The VA loan doesn’t require a down payment. There is a 2.15% VA funding fee that can be rolled into the mortgage which would make the principal and interest payment on $204,300 much less at $1,035.16.

The revised loan limits for 2014 are published by VA and can change each year especially based on high-cost areas. However, a lender can allow a home purchase in excess of these amounts with a 25% down payment on the amount above the limit.

If a purchaser wants to buy a $600,000 home in an area where the VA limit is $417,000, the lender could require a $45,750 down payment and make a $554,250 mortgage. In this example, the purchaser is able to get in for less than 10% down payment and no mortgage insurance.

Veterans with the available funds for a down payment should compare all loan products to consider which will provide the lowest cost of housing. A skilled real estate professional and a trusted mortgage advisor can be valuable resources.

Indecision Costs

More money has been lost to indecision than was ever lost to making the wrong decision.  The economy and the housing market have caused some people to take a “wait and see” position that could cost them in lost opportunities as well as almost certain higher costs in the future.

To illustrate what the opportunity cost might be, let’s compare what the value of the down payment two years from now would be if it was invested in a certificate of deposit, the stock market or used to purchase a home today.

A 3.5% down payment on a $175,000 home is $6,125.00.  If it was invested in a CD that would earn 2%, a person would have $6,372 in two years.  The earnings would be taxed as ordinary income tax rates.  It wouldn't earn much but it would be safe and secure.

The same amount would grow to $7,013 in the stock market if you picked the right stock or fund and it yielded 7%. The earnings would be taxed at the long term capital gains rate.  The return could be greater but so is the risk involved.

If this person were to purchase a home today that appreciated 2% in value over the next two years, the equity in the home would grow to $18,769 due to value going up and the unpaid balance going down.

 

 

 

 

 

 

 

 

The question, we all must ask ourselves is “where should our money be invested?”  Try Your Best Investment to see the difference it will make based on your price range, down payment and earning rate.

Every Renter Should Know

The first home purchase can be the culmination of years of planning and consideration. Buyers typically look for 12 weeks and use a variety of information sources for research before purchasing. However, many renters are not near as thorough in their study.

Like any other commitment a person makes, careful consideration and understanding is required. There are things that every renter should know before they rent a home or apartment.

1. A lease is a binding, legal document.
2. Understand the lease before signing and ask questions.
3. Get the complete agreement in writing instead of verbal statements.
4. Tenants have rights too and they vary depending on the state and city.
5. Tenants need renter’s insurance for their personal belongings and liability.
6. The landlord is responsible for a habitable and safe environment and should typically pay for repairs due to normal wear and tear.
7. Do a walk-through of the property before signing a lease.
8. Don’t withhold the rent to settle a disagreement with landlord.
9. The landlord must return your deposit or tell you why it is being held in a reasonable time.
10. It may cost you considerably less to own the home than to rent.

With the exceptionally low mortgage rates available, the house payment including taxes and insurance can easily be less than the market rent of a home. By the time you factor in appreciation, forced savings due to amortization, leverage and tax savings, the actual cost of housing could be close to half of the rent even if a reasonable repair allowance is factored. Check out your net cost of housing.

Fifteen Will Get You Three

Freddie Mac chief economist, Frank Nothaft, says that affordability, stability and flexibility are the three reasons homebuyers overwhelmingly choose a 30 year term.  However, for those who can afford a higher payment, there are three additional reasons to choose a 15 year term: save interest, build equity and retire the debt sooner.

First-time buyers have a higher tendency to use a minimum down payment and are very concerned with affordable payments.  It is understandable that the majority of these buyers select 30 year, fixed-rate mortgages.

Consider a $200,000 mortgage at 30 year and 15 year terms with recent mortgage rates at 4.2% and 3.31% respectively. The payment is $433.15 less on the 30 year term but the interest rate being charged is higher.  The total interest paid by the borrower if each of the loans was retired would be almost three times more for the 30 year term.

Another interesting thing about the 15 years mortgage is that more of the payment is going to principal than interest from the very first payment.  It would take over 13 years on the 30 year mortgage for the principal to exceed the interest allocation.

Some people might suggest getting a 30 year loan and making the payments as if they were on a 15 year loan.  That would certainly accelerate amortization and save interest. The real challenge is the discipline to actually make the payments on a consistent basis if you don’t have to.  Many experts cite that one of the benefits of homeownership is a forced savings that occurs due to the amortization that is not necessarily done by renters.

An Unexpected Expense

In a study released by TD Bank, 65% of buyers with mortgages that required mortgage insurance said the higher monthly payment was more than they originally expected.

Private mortgage insurance is required on loans that exceed 80% of the home’s value.  For conventional loans, the premiums range from 0.5% to 1% annually.  The PMI could add close to $100.00 a month to the payments on a $200,000 mortgage and over $200.00 a month on a FHA mortgage.

FHA has two components to its mortgage insurance which includes an up-front charge on closing of the loan and an annual charge.  The up-front premium is 1.75% of the mortgage which can be paid in cash at closing or added to the mortgage amount.  The annual premium ranges from 0.45% to 1.35% depending on the loan-to-value and term of the mortgage.

Most lenders are required to automatically cancel coverage when a 78% loan-to-value is reached which on a 30 year loan with normal amortization could be eight to eleven years depending on original loan amount and interest rate.   If the value of the home has increased as documented by an appraisal so that the current mortgage is below 80% loan-to-value, the lender can be petitioned to eliminate the PMI.

Beginning in April, 2013, FHA requires the mortgage insurance to be paid for the entire term of the mortgage.   Prior to this rule change, it was required to remain in effect for a minimum of five years but could be cancelled when the mortgage is reduced to 78% of the original purchase price.

A homeowner can greatly reduce their cost of housing by avoiding mortgage insurance with a minimum 20% down payment.  If a higher loan-to-value mortgage is required to purchase the home, the objective should be to pay down the mortgage amount to relieve the need for the mortgage insurance.   Generally, loans with lower loan-to-value mortgages also have lower interest rates.

Smooth Home Purchase - Lori Collins

Smooth Home Purchase - Lori Collins

What is a Seller's Market?

It is generally considered a seller’s market when the conditions favor the seller.  This condition exists when demand is high and supply is low without any significant adverse economic conditions taking place.

Demand is determined by ready, willing and able buyers.  Low interest rates with indications that they will begin to rise fuels part of this demand. Rising prices also creates a sense of urgency to avoid higher housing costs.

Inventory is currently below what is considered balanced in most areas. In some areas and price ranges, homes are selling very quickly, with multiple offers and sometimes at above the listing price.  When too many buyers are chasing too few properties, things get competitive and the seller is the beneficiary.

Even when buyers and sellers come to an agreement on price and terms, a challenge can occur if the appraisal doesn’t meet the sales price.  Either the purchaser has to come up with the additional cash or the purchase price has to be renegotiated.

A typical seller wants the most money possible for their home in the shortest time frame with the fewest inconveniences.  A Seller’s Market provides the most likely environment for this to happen.

Don't Leave Home Without...

Planning a summer trip is usually focused on what you’ll do, see and experience.  Enjoy it even more by spending a little time before you leave to make sure your home is safe while you're gone.

Consider these suggestions along with your other normal efforts:

• Tell your neighbors you’ll be out of town and to be aware of any unusual activity.
• Notify your alarm company .
• Discontinue your postal delivery.
• Use timers on interior lights to make it appear you’re home as usual.
• Don’t make it easy for burglars by leaving messages on voice mail or posting on social networks.
• Post on social networks about your vacation after you’ve returned.
• Remove the hidden spare keys and give one to a trusted neighbor or friend.
• Lock everything, double-check and set the alarm.
• Take pictures of your belongings in case you need them.
• Disconnect TVs and other equipment in case of unexpected power surges.
• Adjust your thermostat.
• Arrange for lawn care.
• Consider disconnecting the garage door opener.
• Put irreplaceable valuables in a safety deposit box.

 It’s nice to go out of town on a well-deserved trip and it’s always nice to get back home…especially when it is just the way you left it.

Another Source for a Down Payment

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.

Record Improvements Now

There is a significant difference in how the money you spend on your home is treated for income tax purposes.  Repairs to maintain your home’s condition are not deductible unlike rental property owners who can deduct repairs as an operating expense.

On the other hand, capital improvements to a home will increase the basis and affect the gain when you sell which may save taxes.

Additions to a home or other improvements that have a useful life of more than one year may be considered an increase to basis or cost of the home.  Other increases to basis may include special assessments for local improvements like sidewalks or streets and amounts spent after a casualty loss to restore damage that was not covered by insurance.

Unlike repairs, improvements add to the value of a home, prolong its useful life or adapt it to new uses.

You can read more about improvements and see examples beginning on the bottom of page 8 of IRS Publication 523.  For a form to keep track of money you spend, print this Improvement Register.

Cut Your Housing Costs in Half

Serious shoppers wait for a 50% off sale to make the decision because of the bargain factor.  Renters who are serious about lowering their monthly cost of housing should consider buying with today’s low mortgage rates.  For an example, let’s assume a person buys a $200,000 home with 3.5% down payment on a 4.5% FHA mortgage for 30 years.

The total house payment would be approximately $1,508 per month.  However, once you consider the equity build-up due to normal amortization, a monthly appreciation estimated at 2% annually for this example, the tax savings and paying maintenance that a tenant wouldn’t be required to do, the net cost of housing is $772 a month.  This is almost half of the full mortgage payment.

If this person was paying $1,750 a month for rent, it would cost him almost $978 more to rent than to own. In the first year alone, it would accumulate to over $11,000 which is more than the down payment required of $7,000.

Owning a home is the largest investment that most people make and the down payment of $7,000 to purchase this home would grow to $58,837 in equity by estimating a 2% appreciation and normal amortization.

To check out what your real housing costs might look like, go to Rent vs. Own or contact your real estate professional.

Who Saves the Commission?

One of the most common reasons buyers want to deal directly with the seller is because they feel they can save the commission.  It’s a valid consideration but interestingly, it’s the same reason the seller isn’t employing an agent; they feel they can save the commission.

Both parties cannot save the commission.  The buyer feels they have earned it because they’ve had to find the home, determine its value and negotiate with the seller.  They had to arrange their own financing, title and inspections.

The seller equally feels that they have earned the commission because they have incurred all of the marketing expenses and have invested hours upon hours to be available to show the property, hold open houses and answer inquiries.  They have had to research value, financing, title work and make decisions. 

There is certainly value in all of the things that buyers and sellers are willing to do to save the commission but only one person can save the commission only if the buyer and seller can reach a written agreement.

There is value to having a third party advocate helping each party to the transaction.

The Profile of Home Buyers and Sellers (Exhibit 8-1) reports that 14% of sales were For-Sale-by-Owners in 2004 compared to just 9% in 2013.  The trend shows that agent-assisted sales rose to 88% in 2013 from 82% in 2004.

The three most difficult tasks identified by for-sale-by-owners is attracting potential buyers, getting the price right and understanding and performing the paperwork. When surveyed, sellers most value the home selling in an anticipated time frame and for an expected amount.

The reality is that both parties cannot save the commission.  It is earned by providing specific services that are essential to the transaction.  The capital asset of a home represents the largest investment that most people make.   An investment that important certainly deserves the consideration of a professional trained and experienced to handle the complexities involved.

Consideration could be the key to your new home

Consideration associated with a contract is generally thought to be the price and terms but being sympathetic and courteous towards the seller could make a difference in getting the home you want.

Business people, like store owners, expect to deal with customers and even come to expect behavior that might not be accepted in a purely social atmosphere. Homeowners, on the other hand, may not be aware of what to expect.  They are opening the sanctity of their home to the public for review and criticism.  Buyers may be detached from emotional feelings while the sellers might react unfavorably to comments that are taken personally. 

1. Be on time for appointments; cancel if necessary.  The sellers may be rearranging their schedules and making an additional effort to make it convenient for you to see the property.
2. Be a good guest and respect the seller’s privacy.  Look at the home and avoid looking at the seller’s personal items; there is no reason to look in refrigerators or furniture drawers.
3. Don’t sweat the small stuff.  Try to focus on critical items of a home like location, floor plan, layout, size and not dwell on cosmetic items that are easily and inexpensively changed.
4. It’s not a good negotiating technique to list the defects.  Most people become defensive when presented with a list which could have the opposite effect of helping you get a better deal.
5. Limit your visits until you actually own the home.  It’s natural to be excited and making plans to move into your new home but it is still the seller’s until closing and they’re making plans to move too.
6. Negotiations are generally finished when a contract is completed.  It can be frustrating to continually be asked for “one more thing.” Make a deal with the seller and live with it.  If there’s something you’re not sure about, specify it in writing in the contract.

Some things are obvious: the seller wants the most for their home and the buyer wants to pay the least possible.  Showing consideration to the seller about things that don’t have anything directly to do with price can actually benefit the buyer.

The Question Every Cash Buyer Should Answer

Paying cash for a home seems like a huge advantage to qualifying for a mortgage and an appraisal.  However, for the fortunate few who don’t need a mortgage, there is a question they should answer before they make that decision: Do you think at any point in the future, you might put a mortgage on this property?

It’s important because paying cash for a home could affect the ability to deduct the interest if the homeowner should place a mortgage on the home at a later date.

Most homeowner’s know they can deduct the interest on up to $1,000,000 of acquisition debt on their principal residence but they may not understand the limitations of such debt.

Acquisition debt is the amount used to buy, build or improve a person’s principal residence.  The amount is not static but changes over time.  An amortized loan reduces the principal owed with each payment made and the acquisition debt is reduced accordingly.  If a person stays in a home long enough to retire the loan, the acquisition debt is reduced to zero.

Our current federal law allows a homeowner to deduct the interest on the acquisition debt plus the interest on up to an additional $100,000 home equity debt.  If a person pays cash for a home, the acquisition debt would be zero and the only interest deduction allowed would be for home equity debt.

If you answered yes or even maybe to the question, before you pay cash to buy your home, you should discuss your situation with your tax advisor.

A Lower Payment is Your Choice

94% of purchasers last year opted for a fixed-rate mortgage at some of the lowest rates in home buying history.  Yet, some of them will pay more in interest than necessary based on the time they’ll own the home.

If a person only plans to be in the home a few years, the adjustable-rate can offer significant savings.

Not only is the interest rate on the adjustable-rate lower than the fixed in the initial period, amortization on a lower interest rate amortizes faster than a higher interest rate.

In the example shown below, a $200,000 mortgage for 30 years is compared using a 4.25% fixed-rate to a 3.25% 5/1 FHA adjustable rate.  The first five years of the ARM generates a $113.47 a month savings which accumulates to $6,808.20.  In addition, due to faster amortization on lower interest rate loans, the unpaid balance at the end of five years will be $3,001 lower on the ARM for a total savings of $9,801.

Assuming the adjustable-rate mortgage was to escalate the maximum allowed at each period, the breakeven would occur in 8 years and 6 months. If a person were to sell the home prior to this point, the ARM would provide a lower cost of housing for the homeowner.

For some people, the uncertainty of how the interest rate may change is not acceptable.  On the other hand, for the risk tolerant individual who may be more confident in financial matters or who may know when they’ll be moving next, the ARM can be a smart choice.

To make projections using your individual numbers, see the Adjustable Rate Comparison.

An Exchange Means More to Reinvest

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?

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.

Looking for the Largest Deduction

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.

What's the Point?

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.