Your mortgage is actually helping you save…

Cons of early mortgage payoff

Does peace of mind justify losing tax, income benefits?

Benny Kass, Inman News, Tuesday, August 14, 2012, link

 

<a href="http://www.shutterstock.com/pic.mhtml?id=23907463" target=blank>Mortgage calculation</a> image via Shutterstock.Mortgage calculation image via Shutterstock.

DEAR BENNY: I owe $13,000 on my home and would like to pay it off. My son thinks there is some legality that protects a homeowner when the bank still holds the mortgage. Is this correct? Any information would be greatly appreciated. –Carol

DEAR CAROL: I am not sure I understand your question. If you have a mortgage and owe money to a bank, the lender has the right to foreclose on your home if you become delinquent on your mortgage payment. The lender also has the right to sue you for a money judgment, based on the promissory note that you signed when you first obtained the loan.

As an aside, a Massachusetts court recently handed down an opinion stating that if the lender seeking to foreclose does not have the promissory note, the foreclosure cannot take place. As we all know from the mortgage problems facing this nation over the past several years, many lenders sold (hypothecated) their loans and no longer have the promissory note. This case is binding only in Massachusetts; but I suspect that many more courts throughout the country will follow up with the same decision.

Getting back to your situation, once you pay off the mortgage loan, the bank must release you from further obligations and record a release of the mortgage (deed of trust) on the land records in the county where your house is located.

So long as you are current with your monthly payments, you have nothing to fear from the lender.

But the real question: Why do you want to pay off the relatively small amount that you owe on your loan? I assume you can afford the monthly payment, especially if you have $13,000 available. Do you get (or need) tax deductions? While the interest you pay on a mortgage decreases yearly, there still will be some interest that you can deduct for tax purposes.

I know that readers will tell me, “I am only getting 0.1 percent interest on the money in my bank account so why not pay off a 4 or 5 percent loan?”

This is a personal matter that can only be answered by each borrower. However, after carefully analyzing all of the pros and cons, one “con” is that you do not want to be “house rich and cash poor.” Another “con” is that someday in the future, your bank will start paying you more interest.

So here’s a compromise: Instead of making the exact monthly payment required by the bank, why not add a couple of hundred dollars to the payment each and every month? Make sure that you advise your bank (on the check you send in or on the coupon the bank receives) that you are making an extra payment to be credited toward principal.

In my example, if you add $200 each month, that will reduce your balance each year by $2,400, and will pay off the $13,000 in a little over five years.

I’m here to help with this!

4 habits of highly effective house hunters

Mood of the Market

Tara-Nicholle Nelson, Inman News, Monday, August 13, 2012, link

<a href="http://www.shutterstock.com/pic.mhtml?id=10223158" target=blank>House and bull's-eye</a> image via Shutterstock.House and bull’s-eye image via Shutterstock.

If you follow the news, you might have heard that American motivational speaker Steven Covey passed away from complications of a bicycle accident last month, at 79 years old. Covey’s magnum opus was his 1989 book, “The 7 Habits of Highly Effective People,” which has sold more than 25 million copies since its original publication.

As I see it, the success of the “7 Habits” book and the cottage industry it spawned lies in the simple but profound insights Covey delivered about how to effect change in our own lives and our world — insights he broke down individually while also showing how they interact to create a powerful, holistic way of seeing and being in the world. This approach seems less groundbreaking now than it truly was when Covey crafted it more than 20 years ago.

In honor of Covey and his contribution to millions of lives worldwide, let’s take a look at how homebuyers, facing the often overwhelming task of making smart, sustainable decisions in a volatile real estate marketplace, can put Covey’s “7 Habits” to work. We’ll cover the first four habits this week, and the last three next week.

Habit No. 1: Be proactive. First, let’s define success or “effectiveness” as a homebuyer as successfully closing escrow on a home that then meets one’s and one’s family’s needs, for as many years as they want or need it to, without ending up in mortgage distress.

Highly effective house hunters know that the ultimate responsibility for their success lies with them, not with their agent, mortgage broker, the home’s seller or the market. So, they are proactive: They run their own household financials; they are careful not to overextend themselves; and they are diligent when it comes to viewing homes, reading inspection reports and following up on things, during and after the transaction.

Habit No. 2: Put first things first. When it comes to homebuying, the very first step effective homebuyers take is the step of ensuring that they are financially ready for homeownership. That looks different for different people, but if you’ve struggled with debt or saving money, putting first things first in the context of your homebuying dream might actually involve nothing more than paying off your excessive debt, changing any dysfunctional financial habits you may have (like overspending) and creating good habits around putting money away.

For other homebuyers, it might be as simple as obtaining a loan approval before they actually start the process of house hunting in earnest.

Homebuyers who jump into looking at houses before they have handled their financial matters often end up taking on unsustainable or otherwise unwise mortgage obligations they might not have if they had put first things first.

Habit No. 3: Begin with the end in mind. I’ve long believed the best way to approach the homebuying process is to sit down and devote an hour to writing out your personal “Vision of Home.” The aim is to avoid jumping right into the granular details of how many bedrooms, bathrooms and square feet you need, but rather to invest some energy into cultivating true clarity on what you want your entire life to look like after you own this home.

Buying a home is, in my opinion, the most wholesale opportunity to intentionally design nearly everything about your life that most people will ever embark on, given that it has potentially massive impact on nearly every area of your life, including:

  • your family;
  • your extracurricular pursuits and passions;
  • your finances;
  • and even your work life, in terms of commuting and comprising your largest expense (requiring you to keep a certain level of income and do whatever it takes, work-wise, to ensure that).

Homebuyers who want to be effective should consider beginning with their endgame, their post-homebuying vision of how, where and with whom they will live, spend their time, work and play.

Habit No. 4: Think win-win. Nowhere does it say that for the buyer to get a good deal, the seller must leave the transaction utterly dejected and depleted. In fact, many of the great brokers and agents in the world look at things precisely the opposite way: A seller wants to move on to the next phase of her life by selling this property, and the buyer wants to move on to his by buying it.

Many highly effective agents see their role as facilitating both of these aims in a single transaction (while protecting their own clients’ interests in the process). Further, many sellers truly, deeply care about their homes and neighborhoods and relish the thought of passing it to someone who will care for it and thrive there.

This doesn’t mean you should overpay for a property or otherwise fail to take advantage of market dynamics when they are in your favor. Rather, it means that effective house hunters often approach sticky negotiations with respect for the folks on the other side of the table and a willingness to be creative and flexible where they can to help get to a set of deal terms that works well for both sides.

Another key to the housing shortage…

Shadow Inventory not so Ominous Anymore

Jann Swanson, Mortgage News Daily, Aug 8 2012, link

Despite what it termed “decidedly good news over the past quarter” regarding house prices, Frank Nothaft, Chief Economist of Freddie Mac said today that “the ominously termed ‘shadow inventory’ is casting a pall of uncertainty over recent signs that home values have bottomed out.”

There are indications everywhere that the market is strengthening he said in his office’s August U.S. Economic and Housing Market Outlook.  It cited the 4.8 percent gain in Freddie Mac’s House Price Index, the 2.5 percent June-to-June increase in the CoreLogic house price index, and the annual gains in the Federal Housing Finance Index.  So, the report asks, “have we arrived at the house-price inflection point or is there a shadow inventory lurking ready to send house prices tumbling again?”

Various measures suggest that while there is a shadow it is not so foreboding and, in fact, has shrunk.  Even if some local markets continue to be lopsided, the nation as a whole may be about to return to a healthy supply and demand balance.

Although there are still a lot of delinquent mortgages out there and the shadow persists, the report says there is an important difference between the market today and that of recent years – the excess supply of vacant homes has been substantially reduced.  The most recent Census Bureau report showed a decline in overall vacancies in homes both for sale and rent and rental vacancy rates have fallen to the lowest point since 2001 and for sale vacancies to the lowest point since 2006.

As can be seen in the chart below, the vacant “overhang’ grew rapidly to close to two million dwellings from 2006 through 2009 and this oversupply of housing stock exerted considerable downward pressure on rents and home values from the middle to the end of the first decade of the 2000s.   The overhang also suppressed homebuilding so the relatively small amount of new construction and new household formation has allowed much of the excess inventory to be absorbed.  This is of course a local affect with many tight markets and others with continued excess stock but nationally the for-rent market is in relatively good balance.

This continuing shrinkage in vacant stock is important because it means that in most markets the bank-owned properties (REO) on the market are not competing with an oversized vacant housing inventory and thus may be more attractive to investors and first-time homebuyers.  With fewer vacant homes available REO will also have less effect on other home sales and values.  Further, increased home sales overall mean a smaller proportion of sales are of distressed properties which then have less impact on prices.  CoreLogic reported that REO had declined to 13.5 percent of sales in May, the lowest share since March 2008.  In many markets short sales and loan modifications have also slowed the growth of REO inventories.

Nothaft concludes that “Recent data continues to suggest that the bottom in the U.S. house-value cycle may have been reached.  Even if national indexes dip in the seasonally weak autumn and winter months, the declines probably won’t be big enough to erase the good second-quarter news on home values.  This means the housing recovery may finally be coming out from the shadows.”

It’s now or never for getting the most out of your home, Sellers…

High-end homeowners rushing to beat 2013 tax increase?

From AOL Real Estate

Teke Wiggan, AOL Real Estate, Wednesday, August 8, 2012, link

<a href="http://www.shutterstock.com/pic.mhtml?id=18031090">Luxury home</a> image via Shutterstock.Luxury home image via Shutterstock.

Editor’s note: The following item is republished with permission of AOL Real Estate. See the original article: “An End to Bush-Era Tax Cuts Could Push High-End Properties Onto Market.”

 

Some well-heeled homeowners are reportedly scrambling to offload luxury properties by the end of the year or else risk having a serious bite taken out of their bottom lines. That’s because if the Bush-era capital gains tax cuts expire in January, as they are expected to, those homeowners would be shelling out a lot more on sales.

Patty Lance, a Realtor at Coldwell Banker Previews International who handles listings in Newport Beach, Calif., said there’s such a rush to sell among silver spooners that she’s decided to target them by hosting webinars on the tax hike’s effect on home sales.

“Sophisticated investors are looking at this, saying, ‘Maybe we need to focus on this right now and time it with the market heating up,'” she said in explaining the reason for her Web seminars. “They are starting to feel that they need to do something in the third quarter, fourth quarter [of 2012] and jump on this.”

And it seems that homeowners in the high-end market might already be doing that. Average sales of homes priced at $1 million or more are up 23 percent from a year ago, according to online listing service RealtyTrac. Also, the company said that the average sales price in the million-plus category — at $2.07 million in May — had dropped 12 percent from last year. That could be a sign that sellers are becoming more willing to accept lower offers.

Meanwhile, median home prices increased year over year by 2 percent in May 2012 compared to the same period last year, CoreLogic reported.

‘We’re telling them to take the profits right now’

Currently, an individual who makes a profit of $250,000 or more on the sale of his or her primary residence ($500,000 or more for a married couple) must pay a 15 percent tax on that profit (minus deductions including renovation costs and closing costs).

But if the Bush-era capital gains tax cuts expire, the tax rate on such proceeds will jump to 20 percent. Plus, starting in 2013, individuals who make at least $200,000 in income (or married couples making at least $250,000) will have to pay an additional 3.8 percent health care tax on capital gains. The legislation is set to go into effect in 2013.

In all, the tax hikes stand to bring the cumulative tax rate on gains from luxury home sales up by 8.8 percent to 23.8 percent. To be sure, the expiration of the capital gains tax cuts is by no means a done deal: Presumptive Republican presidential nominee Mitt Romney has vowed to extend them. And the House of Representatives — with mostly Republican support — voted Friday to extend them for one year, despite opposition from the Senate and President Obama.

But the possibility of the tax increase creates quite the incentive for high-end homeowners to sell before the new year, said Vijay J. Marolia, chief investment officer at Private Wealth Management.

“We’re telling them to take the profits right now,” he said of his high-net-worth clients. “We really feel strongly that taxes are going to go up in the future. The government needs revenues.” Marolia, like Lance, advises clients in the luxury home market.

One of Lance’s clients is a couple who originally bought their home for about $100,000, she said. But after renovations and price appreciation, it’s now worth about $9 million. After deductions, including renovations and closing costs, the couple would get taxed on about $5 million if the home sells for its asking price, she said.

If the capital gains tax cuts expire and they sell next year, the couple would have to fork over about $1.19 million to Uncle Sam. But if they sell this year, they’ll have to pay only around $750,000. That would amount to a savings of about $440,000 for the couple.

‘Sellers are more motivated to listen’

Due to the potential for such savings, “sellers are more motivated to listen and work with an option,” and negotiate with potential buyers, said Frances Katzen, a Realtor at Prudential Douglas Elliman Real Estate, who moves swanky residences in New York City.

Katzen recently closed a $10 million sale in which she said the expected tax increase was “an impacting driver” in her clients’ mentalities as sellers. She also said that she’s currently working with one person, a bigwig at JPMorgan Chase, who also wants to beat the possible tax increase.

The trend could potentially deal a blow to the housing market, as it did in 2010 when affluent homeowners were worried that Congress would raise the capital gains tax. At the time, sellers flooded the high-end market with supply, pushing down home prices, CNBC.com reported.

Marolia said that he expects the supply of luxury homes to increase partly because of the pending tax increases, but even more so because of the growing perception that home prices are on the upswing. He said that should coax more homeowners to put their homes up for sale.

Other experts have said that the luxury market has reached a crossroads, where sellers who previously withheld their homes from the market in the hope that prices would rise have now given up on substantial appreciation.

So far this year, the supply of $1 million-plus homes has increased 15.7 percent, RealtyTrac reported.

However, both Lance and Katzen said there’s more than enough demand to offset any downward pressure on prices created by swelling inventory.

“We have so many buyers sitting on the fencepost right now,” Lance said.

HAFA 101: The Possibilities & The Limitations

What HARP 2.0 can — and can’t — do for you

Ilyce Glink, CBS News, August 13, 2012, link
 (Shutterstock.com)

(MoneyWatch) Many of the people who contact me after reading my column or listening to my radio show have the same problem: They want to take advantage of low interest rates to refinance their mortgages, but their banks won’t do it because the value of their home is now less than what is owed on the loan.

While we’ve all heard about people who bought homes during the housing boom that they couldn’t afford and who are facing foreclosure. But even responsible consumers who bought homes well within their means and can still afford their payments are in trouble these days. Stuck with homes worth far less than they fork out every month on the mortgage, such borrowers are essentially throwing money away.

To help responsible borrowers in this boat, the Obama administration rolled out the Home Affordable Refinance Program in 2009 as part of the Making Home Affordable program. The first program fell short of its goals, so the government made some changes and rolled out HARP 2.0. That seems to have boosted participation in the program. Twenty percent of all U.S. refinancings in May (the latest figures available) were under the HARP program, according to the Federal Housing Finance Agency.

Given the renewed interest in HARP, it’s a good opportunity to go over what the program is all about.

What is HARP 2.0? HARP 2.0 is a program that allows homeowners who are “underwater” on their mortgages to refinance. In particular, it’s geared toward people who can’t find assistance elsewhere. “These are people who don’t qualify for a traditional refinance because their homes are underwater,” said Fred Glick, principal of US Loans Mortgage and US Spaces Realty. “This is the only program that allows them to refinance their loans.”

How is HARP 2.0 different than HARP 1.0? There are two key changes between the first and second versions of the program. First, unlike its predecessor, HARP 2.0 allows borrowers with mortgage insurance to qualify for a refi. This opens up the program to an entirely new — and much larger — pool of borrowers.

Perhaps most important, the new originator is relieved of responsibility for anything that happened on the first loan. “If there was massive fraud on the underwriting of the first loan, the new lender is not responsible,” Glick explained. “They’re only responsible for any new fraud that occurs. This means lenders are more willing to help.”

Who is eligible for a refi under HARP 2.0? According to MakingHomeAffordable.gov, in order to qualify for the program your mortgage must:

  • Be owned or guaranteed by Freddie Mac or Fannie Mae
  • Have been sold to Fannie Mae or Freddie Mac on or before May 31, 2009
  • Not have been previously refinanced under HARP, unless it is a Fannie Mae loan that was refinanced under HARP between March and May of 2009

The current loan-to-value ratio on a mortgage also must be greater than 80 percent to be eligible for refinancing, and you must be current on payments for the last 12 months. On its site, MakingHomeAffordable points out that these criteria are for guidance only and that interested borrowers should call their mortgage servicers to find out if they qualify.

Glick said that borrowers interested in using HARP 2.0 need to have a credit score of at least 620, noting that these are “full doc” loans. In other words, homeowners must be able to prove income and assets in order to qualify for the reduced payment.

Find a mortgage broker who knows the ins and outs of your particular loan when trying to refinance under HARP 2.0.

(Credit: Shutterstock.com)

How do I find out if my lender is participating? Any mortgage originator can issue a HARP loan, so it’s not necessary for borrowers to go back to their original lender. That said, just because any lender can participate doesn’t mean all of them do. Call around to find lenders who are offering refinancing under HARP.

Who should I contact? Since you’re not required to go to your original lender to obtain a refi under HARP 2.0, you have the option of working with any broker or bank lender. Shop around so you understand what kinds of programs lenderes are offering. If you want to make it easier, Glick suggests finding a mortgage broker who is familiar with your particular situation. “Each lender has its own quirks,” he said. “In particular, Freddie Mac has a lot of quirks in its system right now.”

Ask a trusted friend, family member, or real estate professional if they have any brokers they can recommend. Also make sure to interview more than one to find the right fit. Glick said you’ll know you’ve found a good broker when the person starts asking lots of questions about your loan. “There are a million little things they have to know, the little twists and turns,” he added. So if a broker doesn’t know enough to understand the questions she needs to ask, it’s time to move on.

Understand that because you’re going into a HARP refinance, you won’t get the kind of interest rates you’re hearing about, like 30-year fixed-rate loans at 3.25 percent. HARP loan rates this month are generally over 4 percent.

If you feel that you were wrongly foreclosed on or received a foreclosure notice in error, go to IndependentForeclosureReview.com. If you’re a homeowner and have questions about whether you qualify for a loan modification or refinancing under HARP 2.0, contact the Homeowner’s HOPE hotline at 1-888-995-HOPE or go to MakingHomeAffordable.gov.