Save Big! 15-Year v. 30-Year Mortgage Loan

Thinking about refinancing or getting a new loan?

Check out the infographic, prepared by California Association of Realtors to help those refinancing or contemplating a new mortgage.

It shows how much you can save in life-of-the loan interest charges if you can afford a 15-year rather than a 30-year mortgage.

Save Big Big

Fiscal Cliff Approval and Real Estate

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Real Estate Tax Provisos for 2013

 

Finally, “fiscal cliff” debate is over! For months now, it’s been impossible to turn on the TV or radio without getting an earful of breathless and mostly unwanted information.  Even though most of us now regard Congress as on a par with cockroaches, what happens there does have an impact on our lives. All the more reason for members of Congress to act like grownups, but that’s another topic…

home money

Real Estate Tax Deductions

Rushed through at the last minute, the “fiscal cliff” legislation contains a number of important provisions and none more important than those that relate to real estate.  Here are a few of the most salient.

  • Short sale taxation relief extended for another year until January 1, 2014
  • Deduction of mortgage insurance premium is retroactive to 2012 and extended to 2013 for incomes under $110,000
  • 10% tax credit [up to $500] for energy-saving home improvements retroactive to 2012 and through 2013.
  • Capital gains tax stays at 15% except for those earning over $400,000 [single filer] or $450,000 [joint] and then it’s 20%.
  • $250,000/$500,000 [single/married] exclusion on capital gain from sale of principal residence remains unchanged.
  • Estate taxes on first $5 million for individual and $10 million for family estates are ZERO.  Above those amounts, the rates are 35% and 40% respectively.

Effect of Real Estate Provisos of 2013

Given these provisos, it’s clear that real estate remains in a privileged position as far as federal taxes go. Not only do homeowners get a tax deduction  for the interest in their mortgage payments, which is unheard of in other developed countries, such as Australia and Canada, but we can deduct mortgage insurance premiums which are only applied if the equity in the home is less than 20%. By extending this tax deduction, Congress is implicitly encouraging home ownership among those who do not have the traditional 20% down payment. Is this a good thing? Considering the recent mortgage meltdown, maybe not.  It does help lenders and real estate professionals, though.

Homeowners also get to purchase equipment for their homes and then deduct some of the cost–just so long as it saves energy and fits the criteria.  Naturally, no one can argue that energy-saving is bad, but here the government supports homeowners and no one else.

Additionally, estate taxes on the first $5 or $10 million, depending, amount to nothing. This also supports homeowners since a large proportion of most estates of this size is made up of real estate holdings, both principal residence and investment properties. Again, the tax code is supporting home ownership and investment in property.

Last, but not least, the tax code encourages home ownership by not taxing any capital gain up to $250,000 or $500,000 respectively. This means that home owners can sell their homes frequently, pocket the gain or purchase a more expensive home, without worrying at all about taxes. This has been part of the tax code several decades, though the amounts have increased, and does encourage home ownership. In fact, it encourages or at least does not discourage serial home ownership.  Of course, this benefits those who change jobs and must change jobs, but it also benefits lenders and real estate professionals.

Extending the tax relief to those who short sale their homes is in a different category. So long as underwater homeowners face no tax penalties for short selling their homes,  they will usually prefer it to the foreclosure alternative. At the same time, short sales are a much faster way of  dealing with an inability or unwillingness to pay the mortgage in underwater homes.  Short sales help to clear the vast inventory of underwater property which has been clogging the system for the past few years making it difficult for the real estate industry to recover.

 

How To Assume A Non-Assumable Loan

Half the Country Has Bad Credit

It’s no secret that half the county’s credit has been trashed during the Great Recession. Due to short sales, foreclosures, bankruptcies, job loss and assorted maladies, a significant chunk of the population can no longer qualify for a mortgage loan. Add, too, the new, much more stringent, underwriting guidelines adopted by lenders in the wake of their irresponsible behavior during the “bubble” years and that creates a huge problem for many, many would-be home buyers and investors.

Assumable Loan

What to Do?

What to do? One thing buyers can do is search out seller-financed properties, though often such sellers, too, will check out the credit report and be unhappy with the result. Another, lesser-known, option is to assume an existing loan, saving thousands of dollars in closing costs to boot.  Now, this, too, has its own problems since most fixed-rate loans of the past 10 or so years have a “non-assumable” clause. This means that if the property title is transferred, the  new owner cannot take over the old mortgage. Most loans have a “due-on-sale clause”, meaning the lender can call in the entire amount of the loan in the event of a title transfer. Even the “assumable” loans usually require that the buyer qualify.

Assumable Mortgage

Some Ways To Assume a Non-Assumable Loan

Is there a work-around? Thankfully, in some cases, but certainly not all,  it may be possible to assume a non-assumable loan. Here are some of the scenarios where that may just work.

  1. Make Sure There Is A Due-On-Sale Clause. Even if the lender insists that the mortgage is not assumable, here’s a tip: read the mortgage and promissory note to make sure that it has a due-on-sale clause.  With all the confusion in the past few years, the lender may not even be able to produce the required documentation.  Without it, no due-on-sale clause is legally enforceable.  This is a check-with-a-real-estate attorney option.
  2. Death of a Joint Tenant. When the surviving joint tenant receives title after a death, federal law, the Garn-St. Germain Depository Institutions Act of 1982, prohibits the mortgage lender from enforcing a due-on-sale clause.
  3. A Related Owner-Occupant Inherits. When a related owner, such as a spouse, either occupies or continues to occupy the property, the lender cannot enforce a due-on-sale clause.
  4. A Junior Lien Is Placed On The Property. Here, too, the primary lender is enjoined from enforcing the due-on-sale clause.  In reality, the primary is in a better position if the homeowner has a second mortgage or an equity line since now two parties are  vitally interested in seeing that payments continue to flow in.
  5. An Owner-Beneficiary Trust Takes Title. These days, trusts and, especially inter vivos trusts, are used to avoid probate costs. Although the lender cannot enforce a due-on-sale clause under this scenario, the mortgage-holder does have a right to a copy of the trust.
  6. Transfer After Divorce. After a divorce the lender cannot enforce a due-on-sale clause if either children or a former spouse occupy or continue to occupy the property. They must occupy though.
  7. Ask About an Assumption Fee. Even if the situation is not one of the above, it always pays to ask the lender if an assumption is possible despite the presence of a due-on-sale clause. Especially if the loan is in default, the lender may be exceedingly happy to have the loan brought up to date often with no fee whatsoever. Lenders today have plenty of foreclosures and short sales already and so may be quite willing to make a mutually-beneficial deal.

Is Buying A Home Still Worth It Today?

You know the picture–rose-covered cottage, while picket fence, yard for frolicking dog and kids. Is this still what we want? More and more polls and surveys are saying-No, we’d rather rent.   Does that mean for now or permanently? This is the question for which not only the public, but every segment of the real estate industry craves an answer.

Let’s take a look. Is it still worthwhile to own a home today? What are some of the advantages  of home ownership?

    • Having a home is a great tax deduction. Yeah, sure, but that’s a pretty boring reason to go to all the trouble of buying a house unless you’re an accountant. Next.
    • Having a home saves money.  This is what we were all led to believe. All the money spent on the mortgage, repairs, lawn care would all translate into increased equity. Not lately. Do you believe that in the long run home values will go up again? If so, then this could still be true. I, for one, do believe that, eventually, values will go up, but I don’t know when or by how much. This one is kind of shaky.
    • Having a home is a creative outlet.  Well, this one is definitely true. Need to remodel your kitchen or bathroom, do an addition or just paint a bedroom? If you own the home, you get to do it your way even if that includes purple ceilings and green and orange striped walls or no walls at all. Your way is the right way if you own the home. This can be really fun.
    • Having a home is a learning experience. You got that one right, for sure. You will learn all about interesting things like unstopping a  toilet, repairing a leaky roof, getting the doorbell to work, putting up ceiling fans, and installing drywall. This will make you a better, more well-rounded person to boot.
    • Having a home confers prestige. Ever give your address in a store and the clerk asks you: is that an apartment of a house? How proud you will be to say-It’s a house! And, it’s yours.
    • Having a home gives you freedom.  Oh, I know you’re going to quibble and whine how you’re  tied to a giant monkey on your back. But, really, now you can turn the TV or stereo up as loud as you want. You can cook kippers and not worry about the smell. You can smoke if you want. [I hope you don’t want.]

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  • Having a home is good for animals. So many times when you were renting, you couldn’t have a dog or even a cat, sometimes even Iggy the Iguana was persona non grata. Now, you can have a dog or even two dogs, plus a cat(s), rabbits,chickens, snakes, lizards and a whole menagerie as long as you care for them properly. It’s all up to you.
  • Having a home  allows  vegetable and flower gardens. For many, this is a huge plus. If you don’t have your own yard, you have to pay through the nose for organic produce which you can raise at home for peanuts. Plus, roses are beautiful.

Notice how this one is  a double-edged sword, of course, just like many of the reasons for owning a home. Raising flowers or vegetables is a lot of back-breaking work. You have to try it to find out how satisfying it is. Training a dog takes time and attention. Caring for animals costs money and takes time. Most of us find the rewards are worth it kind of like raising kids. Often, the work involved in owning a home is as back-breaking as gardening. You have to want it. Apparently, we still do as 7 out of 10 renters say they are looking forward to buying a house someday.