Reduce Refinancing Costs

There is much more than a lower rate and payment to determine whether to refinance a mortgage.  Lenders try to make refinancing as attractive as possible by rolling the closing costs into the new mortgage so there isn't any out of pocket cash required.

The closing costs associated with a new loan could add several thousand dollars to your mortgage balance.  The following suggestions may help you to reduce the expense to refinance.

·         Tell the lender up-front that you want to have the loan quoted with minimal closing costs.

·         Check with your existing lender to see if the rate and closing costs might be cheaper. 

·         Shop around with other lenders and compare rate and closing costs.

·         If you're refinancing an FHA or VA loan, consider the streamline refinance.

·         Credit unions may have lower closing costs because they are generally loaning deposits and their cost of funds is less.

·         Reducing the loan-to-value so mortgage insurance is not required will reduce expenses and lower the payment.

·         Ask if the lender can use an AVM, automated valuation model, instead of an appraisal.

·         You may not need a new survey if no changes have been made.

·         There may be a discount on the mortgagee's title policy available on a refinance.

·         Points on refinancing, unlike a purchase, are ratably deductible over the life of the loan ($3,000 in points on a 30-year loan would result in a $100 tax deduction each year.)

·         Consider a 15-year loan.  If you can afford the higher payments, you can expect a lower interest rate than a 30-year loan and obviously, it will build equity faster and pay off in half the time.

A lender must provide you a list of the fees involved with making the loan within 3 days of making a loan application in the form of a Loan Estimate and a Closing Disclosure Form.  Every dollar counts, and they belong to you.

Moisture & Mold

Moisture is mold's best friend and it thrives between 40 and 100 degrees Fahrenheit which is why it is commonly found in homes.  Mold spores float in the air and can grow on virtually any substance with moisture including tile, wood, drywall, paper, carpet, and food.

Moisture control and eliminating water problems are key to preventing mold. Common sources of moisture can be roof leaks, indoor plumbing leaks, outdoor drainage problems, damp basements or crawl spaces, steam from bathrooms or kitchen, condensation on cool surfaces, humidifiers, wet clothes drying inside, or improper ventilation of heating and cooking appliances.

• Control the moisture problem
• Scrub mold off hard surfaces using soap and water or other cleanser; dry completely
• Do not paint or caulk moldy surfaces
• Discard porous materials with extensive mold growth
• Avoid exposing yourself or others to mold
• Periodically, inspect the area for signs of moisture and new mold growth

The EPA suggests that if the moldy area is less than ten square feet, you can probably handle the cleanup yourself.  If the affected area is larger than that, find a contractor or professional service provider. 

Increasing ventilation in a bathroom by running a fan for at least 30 minutes or opening a window can help remove moisture and control mold growth.  After showering, squeegee the walls and doors. Wipe wet areas with dry towels.  Cleaning more frequently will also prevent mold from recurring or keep it to a minimum.

A simple solution to clean most mold is a 1:8 bleach/water mixture.  Since homes have thermostatically controlled temperatures and water is used all day long in the kitchen and bathrooms, the environment is conducive to mold. 

See Ten things you should know about mold written by the EPA.

What to Avoid Before Closing Your New Home

It’s understandable; you’re excited; you’ve found the right home, negotiated a contract, made a loan application and inspections.  Closing is not that far away, and you are making plans to move and put personal touches on your new home.

Even if you have an initial approval on your mortgage, little things can derail the process which isn’t over until the papers are signed at settlement and funds distributed to the seller.  The verifications are usually done again just prior to the closing to determine if there have been any material changes to the borrower’s credit or income that might disqualify them.

Most lending and real estate professionals recommend NOT to:

• Make any new major purchases that could affect your debt-to-income ratio
• Buy things for your new home until after you close
• Apply, co-sign or add any new credit
• Close or consolidate credit card accounts without advice from your lender
• Quit your job or change jobs
• Change banks
• Talk to the seller without your agent

The  lender and I are working together to get you into your new home.  It’s understandable to be excited and feel you need to be getting ready for the move.

Planning is fine but don’t do anything that would affect your credit or income while you’re waiting to sign the final papers at settlement.

Rising Rates Affect the Cost Too

Mortgage rates have risen 0.5% in 2018 on 30-year and 15-year fixed rate mortgages and experts expect them to continue to increase. Buyers paying attention to the market understand the relationship that inventory has on pricing; when the supply is low, the price usually goes up. Rising interest rates can affect the cost of homes also.

When interest rates go up, fewer people can afford homes. Lower numbers of buyers can affect the demand, which could cause prices of homes to come down. The question is how much do the interest rates have to go up to affect demand?

As the rates gradually go up, the affect may not be noticeable at all except for the fact that the payments for the buyer have increased.

A ½% change in interest is approximately equal to a 5% change in price. A $300,000 mortgage at 4.5% for a 30-year term will have a $1,520.06 principal and interest payment. If the mortgage rate goes up 0.5%, it would affect the payment the same as if the price had gone up 5%. The difference in payments for the full term of the loan would be $32,547.

There are some things beyond buyers’ control, but indecision isn’t one of them. If they haven’t found the “right” home yet, it is understandable. However, when that home does present itself, the buyer needs to be ready to make a decision. If they are preapproved and have done their due diligence in the market, they should be able to contract before significant changes occur in the mortgage rates.

Replace It Anyway

If it's not broken, why would a homeowner consider replacing something as expensive as a toilet when there may be other things in the home to replace that provide more aesthetic appeal. Don't be too quick to ignore the functionality and the reliability of this basic convenience.

The first rationalization might take place at the economic level. A water-saving model could easily pay for itself in a few years and then, there is the good feeling of participating in the conservation of our natural resources.

Having to plunge a toilet more than once a week could motivate a homeowner to spend money on a replacement especially, if having made repairs to the flapper and fill valve didn't solve the issue.

Maybe your existing toilet has ugly scratches that make it difficult to clean. Maybe there are cracks in the tank or bowl that you're concerned will develop into a leak at the worst possible time.

The average cost to replace a toilet is around $400 with models ranging more and less based on the features and brands. Round toilet bowls tend to take up less room, are less expensive and better suited for children. Elongated bowls generally take more room, have more powerful flushing action, more comfortable, more stylish and cost more.

Replacing the shut-off valve for the toilet could be a good thing to do while you're replacing the toilet. Generally, it is as old as the toilet and having a reliable valve that works could be very convenient in a future repair or emergency.

There are a variety of videos on YouTube that could give you the confidence to do it yourself or simply, to have a better understanding of the scope of the project

Before You Leave Town...

Along with all the planning of what you're going to do and where you're going to stay, consider this checklist to make you feel more comfortable while you're away from home.

• Ask a trusted friend to pick up your mail, newspaper and keep yard picked up to avoid an appearance of not being at home.
• Stop your mail (USPS Hold Mail Service) and your newspaper.
• Don't post about your trip on Facebook and other social media until you return; some burglars look for this type of announcement to schedule their activities.
• Do notify police or neighborhood watch - especially if you're going to be gone for more than just a few days. Let your monitoring service know when you'll be gone and if someone will be checking on your home for you.
• Light timers make it look like someone is home. Set multiple timers for various times to better simulate someone at home. There are plug-in modules for lights and appliances that would allow you to control them from your phone while your out of town.
• Do unplug certain appliances - TV, computers, toaster ovens that use electricity even when they're off and to protect them from power surges.
• Don't hide a key; burglars know exactly where to look for your key and it only takes them a moment to check under the mat, above the door, in the flower pot or in a fake rock.

These easy-to-handle suggestions may protect your belongings while you're gone while adding a level of serenity to your trip.

Owning Makes More Sense

When comparing the cost of owning a home to renting, there is more than the difference in house payment against the rent currently being paid. It very well could be lower than the rent but when you consider the other benefits, owning could be much lower than renting.

Each mortgage payment has an amount that is used to pay down the principal which is building equity for the owner. Similarly, the home appreciates over time which also benefits the owner by increasing their equity.

There are additional expenses for owning a home that renters don't have like repairs and possibly, a homeowner's association. To get a clear picture, look at the following example of a $300,000 home with a 3.5% down payment on a 4.5%, 30-year mortgage.

The total payment is $2,264 including principal, interest, property taxes, property and mortgage insurance. However, when you consider the monthly principal reduction, appreciation, maintenance and HOA, the net cost of housing is $1,218. It costs $1,282 more to rent at $2,500 a month than to own. In a year's time, it would cost $15,000 more to rent than to own which is more than the down payment and closing costs to buy the home.

With normal amortization and 3% annual appreciation, the $10,500 down payment in this example turns into $112,00 in equity in seven years. Check out your own numbers using the Rent vs. Own or call me at (707) 373-9908 Lori. Owning a home makes sense and can be one of the best investments a person will ever make.

A Word Homeowners Need to Understand

Acquisition Debt is the amount of money borrowed used to buy, build or improve a principal residence or second home. Under the new tax law, mortgages taken after 12/14/17 are limited to a combination of $750,000 on the first and second homes. The mortgage interest on this debt is tax deductible when itemizing deductions.

It is a dynamic number that is reduced with each payment as the unpaid balance goes down. The only way to increase acquisition debt is to borrow money to make capital improvements.

Prior to the new law, homeowners could additionally borrow up to $100,000 of home equity debt for any purpose and deduct the interest when itemizing deductions. Mortgage interest on home equity debt is no longer deductible unless it is for capital improvements.

Acquisition debt cannot be increased by refinancing. Some confusion occurs because mortgage lenders are concerned in making home loans that will be repaid according to the terms of the note and using the home as collateral. That does not include making a tax-deductible mortgage.

Another thing that adds confusion to the issue is that the lenders will annually report how much interest was paid in a year but only the amount that is attributable to acquisition debt is deductible.

Even if the interest on the cash-out refinance is not deductible, it may be advantageous to pay off higher interest debt such as credit card debt and replacing it with lower mortgage debt.

It is the responsibility of the taxpayer to know what part of their mortgage debt is deductible. The challenge becomes more difficult after a cash-out refinance. Homeowners should keep records of all financing and capital improvements and consult with their tax professional.

Unexpected Expenses

It's common for Sellers to consider offering a home warranty or protection plan to make their home more marketable. A growing number of homeowners are now purchasing this type of protection for themselves to limit the unexpected expenses of repairs and replacements.

A home protection plan is a renewable service contract that covers the repair or replacement of many of the components in a home. Some homeowners especially like the convenience that it organizes a qualified service provider as well as the cost of the repairs or replacements.

There are a variety of companies that offer home warranties and the coverage may differ but the majority of things will include heating, air conditioning, most built-in and some free-standing appliances, as well as other specific items. Additional specific coverage may be available for other items like pool and spa equipment.

Some investors are even placing this coverage on their rental properties to limit the amount of repairs during the year. It is a viable way to manage the financial risk and the stress dealing with unexpected expenses.

Call me at (707) 373-9908 Lori if you'd like a recommendation of available programs.

Don't Let a Killer In

Carbon monoxide is a silent killer you don't want in your home but because it is colorless and odorless; you may not even be aware the deadly condition exists. The Center for Disease Control says more than 400 people in the U.S. die annually from carbon monoxide poisoning and over 10,000 require medical treatment each year.

Unmaintained furnaces, water heaters and appliances can produce the deadly gas. In addition, other sources could be leaking chimneys, unvented kerosene or gas space heaters or exhaust from cars or trucks operating in an attached garage.

The Environmental Protection Agency suggests the following to reduce exposure in the home:

• Keep gas appliances properly adjusted
• Install and use an exhaust fan vented to the outdoors over gas stoves
• Open flues when fireplaces are in use
• Do not idle car inside garage
• Have a trained professional inspect, clean and tune-up central heating systems annually

Headaches, nausea, vomiting, dizziness and feelings of weakness or fatigue are a few of the most common symptoms. Lower levels of exposure to carbon monoxide may be mistaken for the flu.

Carbon monoxide alarms should be on every level of a home and especially, in sleeping areas. The alarms can be purchased for as little as $25 and plugged into the wall like a night light.

Regardless of the government requirements, no one would want to put their family, guests or themselves at risk for something so deadly.

Waiting Will Cost More

An economist responded when asked how interest rates would change: “They may fall some and then, rise and after that, they’ll fluctuate.”

Just because interest rates have been low for ten years doesn’t mean they are supposed to be low. The Federal Reserve has raised interest rates twice this year and are expected to go up twice more plus three times next year.  Mortgage rates have risen from 3.95% to 4.62% since the first of January.

Increased rates directly affect the payments on homes but so does the price. With inventory levels remaining low, the prices will continue to go up. When interest rates and prices rise at the same time, it costs buyers a lot more.

If the mortgage rates go up by one percent and prices increase by five percent in the next year, the payment on a $250,000 home could go up by $200 a month. In a seven-year period, the buyer would pay $18,000 more for the home.

People planning to buy a home, need to investigate the possibilities of accelerating their timetable to take advantage of lower rates and prices. Use the Cost of Waiting to Buy  calculator to see how much more it could cost you to wait.  Call (707) 373-9908 Lori if you have questions about what can be done now.

The Tax Difference in Second Homes

A principal residence and a second home have some similar benefits, but they have some key tax differences. A principal residence is the primary home where you live and a second home is used mainly for personal enjoyment while limiting possible rental activity to a maximum of 14 days per year.

Under the 2017 Tax Cuts and Jobs Act, the Mortgage Interest Deduction allows a taxpayer to deduct the qualified interest on a principal residence and a second home. The interest is reduced from a maximum of $1,000,000 combined acquisition debt to a maximum of $750,000 combined acquisition debt for both the first and second homes.

Property taxes on first and second homes are deductible but limited to a combined maximum of $10,000 together with other state and local taxes paid.

The gain on a principal residence retained the exclusion of $250,000/$500,000 for single/married taxpayers meeting the requirements. Unchanged by the new tax law, the gains on second homes must be recognized when sold or disposed.

Tax-deferred exchanges are not allowed for property used for personal purposes such as second homes. Gain on second homes owned for more than 12 months is taxed at the lower long-term capital gains rate.

This article is intended for informational purposes. Advice from a tax professional for your specific situation should be obtained prior to making a decision that can have tax implications.

When Neighbors Don't Seem to Care

A home that isn't being maintained like others in the neighborhood can negatively affect your visual sense of appeal and in some extreme cases, even affect property values. It might be an overgrown yard, a fence in need of repair, excessive noise, unruly pets, paint peeling on the home or even a car or boat parked in front of the home that hasn't moved in weeks.

Most people want to be good neighbors and may be willing to correct an issue once it is brought to their attention. A practical, but possibly confrontational, solution is to contact the responsible person and describe your perception of the issue. However, they may not always agree with the same urgency and it might be necessary to seek other remedies.

An owner-occupant may be more sympathetic to the neighbors and willing to correct the issue. If you think the home might be a rental property, check with the county tax records to identify the owner. They may be unaware of the situation and welcome the notification to protect their investment.

Another alternative might be to notify the homeowner's association, if there is one. One of the benefits of a HOA is to enforce community appearance standards as set in the covenants or bylaws that specify how properties must be maintained. This could be a less personal method of reaching a beneficial outcome.

If the source of the problem is a code or housing violation, the city may be the ultimate authority. Most cities have a separate code and neighborhood services division and some cities have 311 for non-emergency assistance.

Flag Protocol

The American flag is obviously a symbol of our country but it has come to remind us of every man and woman who has fought for the freedom that we enjoy. The emotions that are stirred by images of our flag can run from happiness to sadness to trust and everything in between.

Most of us learned American flag etiquette or the Flag Code when we were young but occasionally, it is a good idea to review the guidelines so that the flag is treated with the respect it deserves.

• The U.S. flag should not be flown at night unless a light is shown on it.
• The U.S. flag should not be flown upside down except as a distress signal.
• The flag should never touch the ground.
• A U.S. flag should be displayed at the peak of the staff unless the flag is at half-staff in mourning.
• When displaying multiple flags of a state, community or society on the same flagpole, the U.S. flag must always be on top.
• When flown with flags of states, communities, or societies on separate flag poles which are of the same height and in a straight line, the flag of the United States is always placed in the position of honor - to its own right. No flag should be higher or larger than the U.S. flag. The U.S. flag is always the first flag raised and the last to be lowered.
• When the U.S. flag is flown with those of other countries, each flag should be the same size and must be on separate poles of the same height. Ideally, the flags should be raised and lowered simultaneously.

More information on flag etiquette can be found at the Veterans of Foreign Wars website.

Second Guessing Price

Imagine a homeowner consulting with their agent about the price to place on their home. The agent suggests that the market data indicates that $200,000 to 210,000 would produce a quick sale by pricing it properly. The owner puts a $210,000 price on the home.

The first person who looks at the home offers $205,000. When the seller receives the offer, he comments that he thinks he priced the home too low and counters for  full price. The counter-offer is rejected, the home stays on the market and at the end of the first month when based on market conditions, the home should be sold, no other offers have been made.

It may be human nature that when an offer is received so quickly, the first thought to come to mind is that it was priced too low. A more appropriate thought might be that it was priced correctly. In some cases, when a home comes on the market, there is increased competition (real or perceived) among the buyers waiting for the "right" home to come on the market. The home can sell for a higher price than if it sits on the market for several months.

There may be stories of sellers who turned down the first offer and ended up receiving a better offer that would net more money. However,  real estate professionals say the first scenario occurs frequently.

The wisdom of experience advises owners to find a real estate professional that they trust and have confidence. Allow that professional to become familiar with your home and compare it to similar homes in the market that have sold recently and ones currently on the market. Determine the demand for homes in the area compared to the inventory. Decide on a price that will allow the home to sell within a relatively short period of time. And lastly, be satisfied if your home sells quickly near the price you put on it.

A Home for Tomorrow

As people near or enter retirement, one of the decisions that typically comes up is whether to sell their "big" home and buy a smaller one. If you know anyone who has been faced with that situation, selling one home and buying a smaller one may not save enough money to make it worthwhile.

There are sales expenses on the property being sold and acquisition costs on the replacement home. Generally speaking, homeowners may not mind a home with less square footage, but they usually don't want to give up amenities or locations that they've become accustomed.

After a little number crunching, the move may not make enough difference in savings and they end up staying in their current home even if it doesn't fit their needs anymore.

What if while this couple were still in their peak earning years, they acquired a home in an area where they would consider retiring and rent it during the interim. They could put it on a 15-year mortgage and possibly, even accelerate the principal payments to have it paid off by their anticipated move.

In the meantime, they could continue living in the "big" home until it is time to make the transition. Sell the "big" home that may be paid for by then and avoid up to $500,000 of capital gain. Take part of the proceeds and remodel the rental/transitional home and invest the proceeds for retirement income.

Ideally, the former rental would be mortgage free by this point, so the retirees would not have a house payment. Even if at this point, they changed their mind about retiring to this particular home, they still have a property that acted as a hedge against rising prices and have sufficient equity to purchase something else without using the proceeds from the "big" home.

It is difficult to know what the situation will be years from now when a person retires. It is clearly advantageous to have a plan that allows for options and choices. To find out more about purchasing your retirement home today, give me a call at (707) 373-9908 Lori.

Assumptions May be an Alternative

For the last 25 years, most buyers have gotten a new mortgage or paid cash when purchasing a home. For a practical reason, owner-occupant buyers have another alternative: assuming a lower interest rate existing FHA or VA mortgage.

In the late 80’s, both FHA and VA began requiring buyers to qualify to assume their mortgages. Prior to that, good credit or even a job wasn’t required. The real reason there haven’t been significant numbers of assumptions in the past 25 years is that interest rates have been steadily going down. If a person had to qualify, they might as well do it on a new loan and get a lower interest rate.

Even though mortgage money is currently attractive and available, it is at a four-year high. When interest rates on new mortgages are higher than the rates of assumable FHA and VA mortgages originated in the recent past, it may be more advantageous to assume the existing mortgages.  Conventional loans have due on sale clauses that prevent them from being assumed at the existing rate.

FHA loans that originated with lower than current interest rates have great advantages for buyers and sellers.

1. Interest rate won't change for qualified buyer
2. Lower interest rate means lower payments
3. Lower closing costs than originating a new mortgage
4. Easier to qualify for an assumption than a new loan
5. Lower interest rate loans amortize faster than higher ones
6. Equity grows faster because loan is further along the amortization schedule
7. Assumable mortgage could make the home more marketable

This financing alternative can save money for the buyer in closing costs and monthly payments. While the equity may be more than the down payment on a new mortgage, second mortgages are available to make up the difference. Call us at (707) 373-9908 Lori to find out if this may be an option for you.

Overlooked Recordkeeping

Homeowners are familiar that they can deduct the interest and property taxes from their income tax returns. They also understand that there is a substantial capital gains exclusion for qualified sales of up to $250,000 if single and $500,000 for married filing jointly. However, ongoing recordkeeping tends to be overlooked.

New homeowners should get in the habit of keeping all receipts and paperwork for any improvements or repairs to the home. Existing homeowners need to be reminded as well, in case they have become lax in doing so.

These expenditures won't necessarily benefit in the annual tax filing but may become valuable when it is time to sell the home because it raises the basis or cost of the home.

For instance, let's say a single person buys a $350,000 home that appreciates at 6% a year. Twelve years from now, the home will be worth $700,000. $250,000 of the gain will be exempt with no taxes due but the other $100,000 will be taxed at long-term capital gains rate. At 15%, that would be $15,000 in taxes due.

Assume during the time the home was owned that a variety of improvements totaling $100,000 had been made. The adjusted basis in the home would be $450,000 and the gain would only be $250,000. No capital gains tax would be due.

Some repairs may not qualify as improvements but if the homeowner has receipts for all the money spent on the home, the tax preparer can decide at the time of sale. Small dollar items can really add up to substantial amounts over many years of homeownership.

You can download a Homeowner's Tax Worksheet that can help you with this recordkeeping. The important thing is to establish a habit of putting receipts for home expenditures in an envelope, so you'll have it when you are ready to sell.

Case Study - Housing Decision During Retirement

A couple is planning to tour the United States in a travel trailer during their first few years of retirement. They are going to sell their current home now and purchase another home when they finish their travels.

An interesting exercise is to determine the optimum time of selling the home: now or when they're ready to buy their replacement home.

If they intend on traveling for more than three years, then, it may be a good decision to sell prior to the sojourn to avoid paying taxes on the gain in their home. IRS allows for a temporary rental of a principal residence while still keeping the $250,000/$500,000 capital gains exclusion intact. A homeowner must own and use a home for two out of the previous five years which means that it could be rented for up to three years, but it would need to be sold and closed before that three-year window expires.

If the travel will be less than three years, there is an option of selling now or later. Using the example below, the homeowner sold the home, paid their expenses and invested the proceeds in a three-year certificate of deposit until the replacement home was purchased.


As an alternative, if the homeowner rented the home, not only would they have income, the home would continue to appreciate and the unpaid balance would go down resulting in larger net proceeds. Based on a 5% appreciation and continued amortization of the mortgage, the net proceeds could easily be $40,000 more.


Obviously, there are a lot of considerations that affect the decision to sell now or later but in an appreciating real estate environment, being without a home for several years could affect the financial position of the owner in the replacement property. It is certainly reasonable to look at various alternatives before making a decision. Call me at (707) 373-9908 Lori to help you look at the different possibilities and talk to your tax professional.

Waiting Period After Distressed Sale

"How long do we have to wait to qualify for another mortgage" is the question concerning people who've had a foreclosure, short sale or bankruptcy. The loan types for the new loan will differ in amounts of time to heal credit scores based on the event.

The following chart is meant to be a general guide for how long a person might have to wait. During this waiting period, it's important that the person be current on all payments and maintains a history of good credit.

A recommended lender can give you specific information regarding your individual situation and can make suggestions that will improve your ability to qualify for a mortgage. This process should be started before looking at homes because of the time constraints listed here can vary based on current requirements and possible extenuating circumstances of your case.

We want to be your personal source of real estate information and we're committed to helping from purchase to sale and all the years in between. Call us at (707) 373-9908 Lori for lender recommendations.

Waiting Will Cost More

With the first quarter of 2018 in the books, the 30-year fixed rate mortgage is nearing what Freddie Mac predicted it would be in the second quarter. If this pace continues, rates will exceed the five percent mark expected by the end of the year.

The Fed has had its first of an expected three raises for this year and two more are expected in 2019. While these rates are not directly related to mortgages, they certainly have an effect.

Delaying the decision to purchase or refinance could be an expensive missed opportunity. A $270,000 mortgage at 4.44% has a principal and interest payment of $1,358.44 per month. If the rate were to rise one-percent in the next twelve months, the payment would be $1,522.88.

The $164.44 increase would cost a homeowner an additional $13,812.97 in seven years and close to $60,000 over the full term of the loan.

The question facing people is "what would you spend $164.44 each month if you had acted sooner to get the lower rate?"

If you're curious to know what your "missed opportunity" could be costing you, try this Cost of Waiting to Buy calculator . Use 0% increase on price change if you are refinancing a home you already own.

FHA Advantages

The Federal Housing Administration, operating under HUD, offers affordable mortgages for tens of thousands of buyers who may not qualify for other types of programs. They are popular with both first-time and repeat buyers.

The 3.5% down payment is an attractive feature but there are other advantages:

• More tolerant for credit challenges than conventional mortgages.
• Lower down payments than most conventional loans.
• Broader qualifying ratios - total house payment with MIP can be up to 31% of borrower's monthly gross income and total house payment with all recurring debt can be up to 43%. There is a stretch provision taking it to 33/45 for qualifying energy efficient homes.
• Seller can contribute up to 6% of purchase price; this money must be specified in the contract and can be used to pay all or part of the buyer's closing costs, pre-paid items and/or buy down of the interest rate.
• Self-employed may qualify with adequate documentation - two year's tax returns and a current profit and loss statement would be required in addition to the normal qualifying and underwriting requirements.
• Liberal use of gift monies - borrowers can receive a gift from family members, buyer's employer, close friend, labor union or charity. A gift letter will be required specifying that the gift does not have to be repaid.
• Special 203(k) program for buying a home that needs capital improvements - requires a firm contractor's bid attached to the contract calling for the work to be done. The home is appraised subject to the work being done. If approved, the home can close, the money for the improvements escrowed and paid when completed.
• Loans are assumable at the existing interest rate with buyer qualification. Assumptions are easier than qualifying for a new mortgage and closing costs are lower.
• An assumable mortgage with a lower than current rates for new mortgages could add value to the property.

Finding the best mortgage for an individual is not always an easy process. Buyers need good information from trusted professionals. Call (707) 373-9908 Lori for a recommendation of a trusted lender who can help you.

Standard or Itemized

Taxpayers can decide each year whether to take the standard deduction or their itemized deductions when filing their personal income tax returns. Roughly, 75% of households with more than $75,000 income and most homeowners itemize their deductions.

Beginning in 2018, the standard deduction, available to all taxpayers, regardless of whether they own a home, is $24,000 for married filing jointly and $12,000 for single taxpayers.

Let's look at an example of a couple purchasing a $300,000 home with 3.5% down at 5% interest. The first year's interest would be $14,630 and property taxes are estimated at 1.5% of sales price would be $4,500.

The interest and property taxes would provide a combined total of $19,130 which is less than the $24,000 standard deduction. Unless this hypothetical couple has other itemized deductions like charitable contributions that would make the total exceed $24,000, they would benefit more from taking the standard deduction.

If the mortgage rate were at 8%, the combined total of taxes and interest would be almost $28,000 which would make itemizing the deductions more beneficial.

Tax professionals will compare available alternatives to find the one that will benefit the taxpayer most. For more information, see www.IRS.gov and consult a tax advisor.

Inventory Continues to be a Challenge

In any given market, inventories fluctuate based on supply and demand considering area and price range. The National Association of REALTORS considers a balanced market to be a six-month supply of homes.

If it takes longer than six months to sell, it is thought to be a buyer's market and less than six months, a seller's market. Most buyers and sellers probably feel a balanced inventory is more like three months' supply of homes.

The inventory of existing homes has been reduced to approximately 1.5 million houses which is 10.3% lower than a year ago. According to the Federal Reserve Bank of St. Louis there are 5.7 months' supply of new homes currently on the market in the U.S.

Inventory has a direct impact on price. When demand is constant, but inventory is reduced, price tends to increase because the same number of people are trying to buy a smaller than normal number of homes.

As easy as it is to recognize the signs of spring, one should be able to spot the direction prices will be moving. When prices and mortgage rates are increasing, buyers are affected by not being able to afford the same price or size of homes.

Your Refund Could be the Difference

One of the silver linings to filing your income tax return is finding out that you are going to receive a refund. If you happen to be one of these fortunate taxpayers, your next decision is what to do with it. With the average tax refund around $3,000, it could be the difference that makes a home a reality sooner rather than later.

Many would-be buyers think it takes 10% or more down payment to purchase a home, but actually, it can be much less. There are VA and USDA mortgages that have no down payment for qualified buyers. FHA has a 3.5% down payment program and FNMA has 3% down payment mortgages for qualified creditors.

Closing costs for originating new mortgages can easily range from two to three percent of the purchase price but most lenders will allow the seller to pay part or all of them based on the agreement in the sales contract.

While the average tax refund might not cover the down payment on the median price home, it certainly helps. Your refund could make it as simple as 1-2-3 to get into a home.

1. Get the hard, cold facts for the homes and mortgages in your area and price range.
2. Get pre-approved with a trusted mortgage professional.
3. Start looking at homes.

Call me at (707) 373-9908 Lori or Lori@CollinsRealty.REALTOR to get started.

Fair Skies on Horizon

Buyers who have been concerned about what might happen to the tax laws affecting home ownership should feel more comfortable about moving forward with their decision to purchase. The 2017 Tax Cut and Jobs Act passed by Congress and signed by the President continues to treat real estate as a favored investment.

Whether it is for a home to live in as your principal residence or to use as rental property, the tax laws are in place but other dynamics to be concerned with are not; mortgage rates are expected to rise as well as prices.

Reasons to buy now:

1. The mortgage interest deduction is intact for most taxpayers.
2. The capital gain exclusion for principal residences up to $500,000 remains in place.
3. Taxpayers can elect annually to take newly increased standard deduction or itemize deductions whichever will benefit them the most.
4. The house payment with taxes and insurance is most likely cheaper than the rent.
5. Rents will continue to rise making the difference even greater in the future.
6. Lock-in the principal & interest payment with a fixed-rate mortgage.
7. 30-year mortgage terms are available to most borrowers.
8. Prices will likely increase due to lower inventories and several years of low housing starts.
9. Section 1031 exchanges, capital gains and depreciation remain the same for rental properties.

For a summary of specific real estate provisions in the 2017 Tax Cut and Jobs Act, click here.

Historical Perspective

In 1968, mortgage rates were 8.5%. The next year, rates went down to 7%. Homeowners could buy a 15-20% larger home for the same payments if they could find someone to assume their mortgage.

FHA and VA mortgages were very popular in certain price ranges and they allowed anyone to assume the mortgage regardless of the credit. If you could find a person to take over your note, you were free to qualify for another mortgage.

In October 1981, mortgage rates reached 18.63%. A $250,000 mortgage had a monthly principal and interest payment of $3,896.46. As astronomical as that rate sounds, people were still buying homes and were good investments.

Four years later, they were still over 12%. The monthly payment was $2,571.53. Believe it or not, people were excited to be paying only 2/3 what they had to pay a few years earlier.

Fast forward to late 1991 when the rates went below 9% and that same payment was to $2,015.16. At the turn of the 21st century, rates were 8.15% and that made the payment $1,860.62. Not much change in rates during that decade.

If we look around the housing bubble, late 2008, the rates were 6.04% and the payment was $1,505.31. By 2009, mortgage rates had fallen below 5%. The lowest mortgage rate was 3.31% on November 2012 with a payment of $1,096.27.

Rates fluctuated for the next few years until now, and most of the experts are expecting them to be above 5% by the end of 2018.  Rates have increased each week for the last six weeks to 4.38% with payments of $1,240.12.

The average mortgage rate for the past 47 years is a little over 8%. The real estate and mortgage markets are cyclical. Rates have been historically low for a long period but will probably continue to rise. Most buyers don’t pay cash and mortgages enable them to purchase now. Based on history, even 8% would be an excellent rate. Until it reaches that point again, everything lower is a bargain.

The "Right" Agent and the "Right" Home

Some buyers think that finding the right home is the critical part of the buying process and that is how they determine which agent to use. While it is important, there may be a broader skill set to consider when selecting your real estate professional.

The most recent NAR Profile of Home Buyers and Sellers indicate that 52% of buyers do want help in finding the right home to purchase. There was a time when the public did not have access to all the homes on the market, but the Internet has changed that.

Helping to negotiate the price and terms of sale were identified by almost 25% of the buyers. No one wants to pay more than is necessary and the terms of the sale can be as important as the price.

The next largest area of assistance that buyers value has to do with financing and the paperwork. Even if a buyer has been through the process before, it very likely could have been several years and things have probably changed.

Since the cost of housing is dependent on the price paid for the home and the financing, a real estate professional skilled in these specialized areas can be very valuable in finding the "right" home. An agent’s experience and connections to allied professionals and service providers is equally important.

Ask the agent representing you to specifically list the tools and talent they have available to address these areas.

Convincing Advantages with Standard Deduction

The new tax law doubles the standard deduction and it is estimated that over 90% of taxpayers will elect to use it. However, even without considering tax benefits, homeownership has convincing advantages.

Besides the personal and social reasons for owning a home, one of the most compelling is that it is cheaper. Principal reduction and appreciation are powerful dynamics that reduce the effective cost of housing.

Amortized loans apply a specific amount of each payment to the principal amount owed to retire the loan over the term. Some people consider it a forced savings account; when the payment is made, the unpaid balance is reduced.

The price of homes going up over time is appreciation. While there are lots of variables and it is not guaranteed, it is easy to research the history of an area and make predictions based on supply and demand.

Interest rates are still low and can be locked-in for 30 years. Without considering the tax benefits at all, the appreciation and the amortization dramatically affect the “real” cost of owning a home.

Consider a $250,000 that appreciates at 2% a year for the next seven years instead of paying $2,000 a month in rent. In the example, the payment is less than the rent being paid even including the property tax and insurance.

When you factor in the monthly principal reduction and appreciation and consider additional owner expenses like maintenance and possible homeowners association, the net cost of housing is considerably lower than the rent. In this example, reduced cost in the first year alone is more than the down payment required on a FHA loan.

Based on the assumptions stated, the down payment of $8,750 could grow to $73,546 in equity in seven years. Can you name another investment with this kind of potential that also provides you a place to live, enjoy, raise your family and share with your friends?

Use this Rent vs. Own to make projections using your own numbers and price range. We’re available to answer any questions you have and to find out what it will take to own your own home.

Lower Your Expenses without PMI

Mortgage loans for more than 80% loan-to-value typically require private mortgage insurance. Mortgage insurance reimburses the lender if a borrower defaults on a loan. PMI is expensive, and homeowners should be aware of how to remove it when certain conditions have been met.

A borrower can request in writing for the lender to cancel the PMI when the mortgage balance has reached 80% of the home’s original appraised value. However, they are required to eliminate it when the balance reaches 78%. It is a good idea to monitor this, especially if additional principal contributions are being made to pay off the loan early.

Other methods to eliminate PMI sooner than through normal amortization include the following:

• If the value of the home has increased, the owner may consider refinancing with a loan that does not require PMI. There will be refinancing charges involved but you can determine how long it will take to recapture those costs from the monthly savings.
• Some lenders will consider using a new appraisal to verify that the home’s mortgage is below the 80% requirement. Find out in advance from your lender if they will accept this procedure and get the names of approved appraisers they will recognize. The cost of an appraisal could range between $450 to $600.
• Another strategy is to make additional principal contributions on a regular basis to reduce your mortgage balance to 78-80% level that would allow the lender to eliminate the PMI.

Mortgage insurance is not required on VA loans regardless of the loan-to-value. FHA mortgages made after June 3, 2013 are required to have Mortgage Insurance Premium for the life of the loan. For FHA loans made prior to that date, the MIP should automatically cancel when the loan-to-value ratio reaches 78% and has been in effect for a minimum of five years.

To obtain additional information specific to cancelling your mortgage insurance, contact info can usually be found on the annual statement provided by your mortgage servicer.

Ready for Retirement

It can be shocking to hear how many people spend more time planning their vacation or next mobile phone purchase than planning for retirement. It is hard to imagine that they are expecting Social Security will take them through their golden years. A person who has paid in the maximum each year to social security can assume to receive about $30,000 a year.

Every adult in the work force, should go to SSA.gov to find out what they can expect based on their planned retirement age. Since it probably won’t be the amount you need to retire comfortably, at least you’ll know how much you’ll be short so that you can devise an investment plan.

There’s an easy rule of thumb used to estimate the investable assets needed by the time they retire to generate a certain income. The target annual income is divided by a safe, conservative yield to determine the investable assets needed.

A person who wants $80,000 annual income generated from a 4% investment would need investable assets of $2,000,000. If a person had $500,000 now, they would need to accumulate $1.5 million more by the time they retire. They would need to save about $100,000 a year to be ready for retirement in 15 years.

If saving that amount does seem possible, an IDEAL alternative could be to invest in rental homes. The familiarity of rental homes like owning a personal residence can reduce some of the risk. Rentals also enjoy other characteristics like income from the operation, depreciation in the form of tax shelter, equity buildup from the amortization of the loan, appreciation and leverage from the borrowed funds controlling a larger asset.

Some investors explain the strategy by buying good rentals with mortgages and having the tenant to retire the debt for you. Single family homes offer the investor an opportunity to meet their retirement and financial goals with an investment that is easily understood and controlled.

A Retirement Projection calculator can give you an idea of how many rental homes you’ll need to supplement your social security and other investments.

Balancing Risk and Deductibles

The benefit of insurance is to transfer the risk of loss to a company in exchange for a premium. The deductible is an amount the insured pays out of pocket before the insurance starts covering the cost of the loss. The challenge is to balance the risk an insured can accept with the premium being charged.

To manage insurance premiums, policy holders often consider adjusting their deductibles. Lower deductibles result in less money out of pocket if a loss occurs in return for higher premiums. Higher deductibles will lower premiums but require that the insured bear a larger amount of the first part of the loss.

Insurance companies offer deductibles as a specific dollar amount or as a percentage of the total amount of insurance policy. The amount is usually shown on the declaration page of homeowner and auto policies.

A small fire in a $300,000 home that resulted in $5,000 of damage might not be covered because it is less than the 2% deductible which would be $6,000. If the homeowner can afford the cost of repairs in exchange for lower premiums, it might be worth it. On the other hand, if that loss would be difficult for the homeowner, a change in the deductible for higher premiums could be considered.

Raising deductibles can save money in the present when paying the premium but could cause problems later if a claim occurs. Homeowners should review deductibles with their property insurance agent to be familiar with the amounts and make any changes that would be appropriate.

Homeowner Tax Changes

The new tax law that was signed into effect at the end of 2017 will affect all taxpayers. Homeowners should familiarize themselves with the areas that could affect them which may require some planning to maximize the benefits.

Some of the things that will affect most homeowners are the following:

• Reduces the limit on deductible mortgage debt to $750,000 for loans made after 12/14/17. Existing loans of up to $1 million are grandfathered and are not subject to the new $750,000 cap.
• Homeowners may refinance mortgage debts existing on 12/14/17 up to $1 million and still deduct the interest, so long as the new loan does not exceed the amount of the existing mortgage being refinanced.
• Repeals the deduction for interest on home equity debt through 12/31/25 unless the proceeds are used to substantially improve the residence.
• The standard deduction is now $12,000 for single individuals and $24,000 for joint returns. It is estimated that over 90% of taxpayers will elect to take the standard deduction.
• Property taxes and other state and local taxes are limited to $10,000 as itemized deductions.
• Moving expenses are repealed except for members of the Armed Forces.
• Casualty losses are only allowed provided the loss is attributable to a presidentially-declared disaster.

The capital gains exclusion applying to principal residences remains unchanged. Single taxpayers are entitled to $250,000 and married taxpayers filing jointly up to $500,000 of capital gain for homes that they owned and occupied as principal residences for two out of the previous five years.

Not addressed in the new tax law, the Mortgage Forgiveness Relief Act of 2007 expired on 12/31/16. This temporary law limited exclusion of income for discharged home mortgage debt for principal homeowners who went through foreclosure, short sale or other mortgage forgiveness. Debt forgiven is considered income and even though the taxpayer may not be obligated for the debt, they would have to recognize the forgiven debt as income.

These changes could affect a taxpayers’ position and should be discussed with their tax advisor.

Surprise When Renting Your Home

Planning to go to the Masters next April 2-9th and don’t have a place to stay. Each year, there are homeowners who rent their home for a big premium during the Masters because hotels are in short supply and demand for private homes is up.

Homeowners go on vacation and make tax-free income while temporary tenants rent their home. Homeowners can benefit from a little known provision in the tax code that does not require taxpayers to recognize the income derived from renting their home for less than 15 days per year. See Plan Ahead for Tax Time When Renting Out Residential or Vacation Property- special rules.

This situation can particularly benefit homeowners where there are large sporting events nearby like golf and tennis tournaments, championship games or other high attendance venues. The demand for a private residence can be more attractive than staying in a hotel which makes the price go up.

Obviously, there are challenges with personal belongings and damage but getting a premium rental rate and not having to recognize the income could be worth it. You’ll certainly want to discuss this with your tax professional prior to making this decision. You’d probably also want to get some help from an experienced real estate professional.