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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.
How's Your IQ on the QM?
The Qualified Mortgage Rule came into effect on January 14, 2014 as one of the results to the Dodd Frank Reform Act to protect consumers from predatory lending practices. This will affect the underwriting standards that the majority of lenders will use to qualify borrowers.
The ability to repay rule states that financial information must be supplied by the borrower and verified by the lender. The borrower must have sufficient assets or income to pay back the loan which limits the maximum debt-to-income ratio of 43%. In an effort to present a more accurate picture of the costs to the borrower, teaser rates can no longer hide a mortgage’s true cost.
A maximum of 3% in upfront points and fees can be paid on behalf of the borrower. There can be no negative amortization, interest-only or balloon payments and the loan term limit cannot exceed 30 years.
While there are more requirements, most deal with good underwriting practices that are followed by reputable lenders such as considering and verifying things that affect the ability to repay the mortgage like income, assets, employment status, simultaneous loans, debt, alimony, child support and credit history.
Every Homeowner Needs One
A water meter key is like insurance; buy it before you need it.
Imagine a pipe has burst and there is water flowing like a river through your home. There may a cut-off valve to each sink if it works and if that’s where the leak is coming from. Your home may have a master cut-off valve but if you haven't used it before, you might not know where it is. The last resort is to cut off all the water to your house at the meter.
In most cases, you'll need a key to get into the meter. With water starting to rise in your home, concern over the damage being done may add to your anxieties. You don’t have time to call a plumber or even go the store to buy a water meter key.
Emergencies are handled much better when you plan for them in advance and practice, even though you hope you’ll never need it.
1. Determine what kind of key you need to open your water meter.
2. Purchase it at the home improvement or hardware store.
3. Practice opening the meter to be able to do it quickly and easily.
4. If your meter key doesn’t have a wrench on one end, you need a wrench to turn the water valve.
5. Practice turning the water off just to see how it works and feels.
6. Put the key in an obvious and conspicuous place.
7. Have the phone number of an emergency plumber, just in case you need it.
While you’re planning for the unexpected, it might be a good idea to show some of the other family members how it works and where you keep the key.
Coffee should be hot. Beer should be cold. Mexican food should be spicy. However, if these things are less than the standard that you expect, there are not any lasting consequences.
As the value of the object in question rises, either in price or gravity, the expectations usually increase and decisions become progressively more important. Marriage, children, health and careers are certainly a few of the more important items that bear careful consideration.
The sale of the largest asset that most people own, their home, also merits having reasonable expectations. A homeowner should expect to get the market value for their home in a reasonable period of time with as few inconveniences as possible.
According to the latest Home Buyers and Sellers Survey, more homeowners are entrusting the sale of their home to real estate professionals. Owners can increase the likelihood of a favorable outcome by sharing their expectations with agents prior to listing their home for sale.
Challenge your agent to explain what they intend to do to:
It is reasonable for a seller to expect the agent will work hard to sell the home; will tell the truth and represent the client’s interests to the best of their ability. Agents exemplify remarkable service when they when they exceed the seller’s expectations.
The more things you have, the more you have to take care of. And in this case, the more that you have to store that gets in the way of finding the things that you actually use. Periodically, you need to go through every closet, drawer, cabinet and storage area to get rid of the things that are just taking up space in your home and your life.
Every item requires the decision to retain or remove. Consider these questions as you examine each item:
• When was the last time you used it?
• Do you believe you’ll use it again?
• Is there a sentimental reason to keep it?
You have four options for the things that you’re not going to keep. If you know someone who needs it or will appreciate it, you can give it to them. You can sell it in a garage sale or on Craig’s List. You can donate it to a charity and receive a tax deduction or you can discard it to the trash.
Start with your closet. If you haven’t worn something in five years, get rid of it. Then, go through the things again and if you haven’t worn it in two years, ask yourself the real probability that you’ll wear it again.
Another way to do it is to move it from your active closet to another closet. If a year goes by in the other closet, the next time you go through this exercise, those clothes are on their way out.
If the items taking up space are financial records and receipts, the solution may be to scan them and store them in the cloud. There are plenty of sites that will offer you several gigabytes of free space and it may cost as little as $10 a month for 100 GB at Dropbox to get the additional space you need. It will certainly be cheaper than the mini-storage building.
A ½% increase in interest rate may not sound like much but it is roughly equivalent to a 5% increase in price. It becomes obvious when you compare the payments.
If you financed 100% of the cost of a $250,000 home at 4.5% interest for 30 years, the payment would be $1,266.71 per month. If the mortgage rate went up to 5%, the payment would be $1,342.05. If the home increased 5% in value, the $262,250 loan at the lower 4.5% rate would have payments of $1,330.05.
The two payments are close enough to justify the statement that a ½% change in interest is approximately equal to 5% change in price.
Each time interest rates go up, fewer people can qualify to buy a seller’s home. The mortgage rules that went into effect this year require buyers to meet specific payment to income ratios. As demand picks up for the seasonal market, most experts expect rates to increase.
Buyers will be doubly challenged in the current market because prices are rising (NAR reports 11% last year) along with the anticipated mortgage rates. Buyers who wait will inevitably be paying more to live in the same home had they acted sooner.
Check out on how Interest Affects Price for a home in your price range.
Find a Better Return
A certificate of deposit will generate a cash flow based on the interest rate that it pays which is the only way it generates a return for the investor.
An investment in a stock that doesn’t pay dividends, would need to be worth more than you paid for it to earn a profit. On the other hand, a stock that paid dividends could make the investor a profit even if it sold for the same price that he paid for it.
Investors can profit four different ways with an investment in rental real estate.
1. Cash flows that result from having a surplus after collecting the rent and paying the expenses.
2. Equity build-up results from a portion of each monthly payment reducing the unpaid balance.
3. Tax benefits can result from the depreciation allowed on the property and the preferential long-term capital gains tax rate.
4. Appreciation benefits the investor when the value of the property increases.
The most conservative investors in real estate make decisions to purchase a rental property based on its ability to generate a cash flow and reduce the mortgage through normal amortization. If the property can offer an acceptable rate of return compared to other available investments, the tax benefits and possible appreciation become an added bonus.
With increased rents and low mortgage rates for investors, rental property can offer significantly higher returns than many of the available alternatives. Contact me for more information- John@JohnRiggins.com; you may be amazed about what is available in the market.
Personal Finance Review
You’ll need to earn $2.00 for every $1.00 you want to spend assuming you pay 50% of your earnings on income tax, social security and Medicare. On the other hand, you get to keep 100% of every dollar you save on your personal expenses because the taxes have already been paid.
Periodically, review your expenditures with the diligence of an exuberant IRS agent on commission. It’s an exercise that most people don’t feel they have time to do but the rewards make it entirely worthwhile.
If you don’t want to review your credit card accounts, consider reporting the cards stolen so that new numbers will be issued. You can notify the companies that need your number. Companies who might have your number won’t be able to automatically renew services that you may no longer be using. You can be assured that they’ll contact you when the old number doesn’t go through and you can re-evaluate the decision at that time.
Interviewing a Mover
“I’d wish I’d know that before I made a decision.” If you’ve ever regrettably said this to yourself, having a checklist might have prevented the issue in the first place. This list of questions can provide you with things to discuss when interviewing a moving company.
What Can You Expect?
The two most frequently quoted constants in life are death and taxes. Two more things would-be homeowners can expect in the near future are increases in mortgage rates and housing prices.
Interest rates have been kept artificially low for several years by the Federal Reserve in an effort to strengthen the economy. Policy is shifting to allow them to seek their own natural level and that will surely result in higher mortgage rates. Rates on 30 year fixed mortgages are up over 1% from January, 2013.
Foreclosure activity is down, new home starts are up and prices have been increasing in most markets for two years. Most experts agree that the cost of housing is going up.
If the price were to go up by 2% and the mortgage rate by 1% while a buyer is “sitting on the fence” making a decision, the payment would go up by almost $175.00 each and every month for the term of the mortgage. Even if a person can afford to make the higher payments, what could they have done with that extra $175.00 a month? Buy furniture? Car payment? Principal reduction? Retirement contribution? Save for a rainy day?
Click here to determine what the cost of waiting to buy will be using your price home.