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Maybe It Is Time To Get Rid Of That HELOC

In September, the Federal Reserve raised interest rates for the third time in 2018 and they’re expected to go up one more time this year and three times next year.  If you have a Home Equity Line of Credit, HELOC, you’re paying more to use that money and it is going to become more expensive.

It may make sense to refinance your home and consolidate the balance of your HELOC to lock in a lower mortgage rate.  Most lenders require that the combination of these loans should not exceed 80% of the home’s fair market value and that you have good credit and adequate income to support the payment.

A HELOC is a first or second mortgage that allows the borrower to withdraw money as needed, up to the line of credit provided by the lender.  A draw period is established where the borrower is only required to pay interest.

Since all HELOC loans are variable rate mortgages, during periods of rising rates, the cost of the funds increase.  However, unlike adjustable rate mortgages that have specified adjustment periods and caps, a HELOC adjusts when the prime interest changes.

The formula for determining available funds on a refinance are to take 80% of the fair market value, which will probably have to be verified by appraisal, less the existing first mortgage and the costs to refinance.  The balance would need to cover the cost of replacing the HELOC.  Any remaining balance may be available for cash to be taken out.

Now is a great time for a mortgage review. In many cases, the equity you have in your home may allow you to eliminate mortgage insurance and substantially lower your monthly payment. As with all tax matters, always consult with a tax professional before making any decisions.  Call us at (206) 979-9632 for a recommendation of a trusted mortgage professional.

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Consumer Protection from Irresponsible Mortgage Practices

Consumer Protection from Irresponsible Mortgage Practices

Congress enacted the Dodd-Frank Act in 2010 in response to the mortgage crisis that led to America’s Great Recession.  The two parts that apply closely to homebuyers are the Ability-to-Repay (ATR) and Qualified Mortgages (QM).

A Qualified Mortgage is a category of loans that have certain, more stable features that help make it more likely that borrowers will be able to afford their loan.  These loans do not allow certain risky features like an interest-only period when no money is applied to reduce the principal; negative amortization that would allow the mortgage balance to increase; and, “balloon payments” at the end of the loan that are larger than the normal periodic payments.

A debt-to-income ratio of less than or equal to 43% has been established to provide a limit on how much of a borrower’s income can go toward total debt including the mortgage and all other monthly debt payments.  However, the Consumer Finance Protection Bureau believes these loans should be evaluated on a case-by-case basis and in some cases, can exceed 43%.

There is a limit for up-front points and fees the lender can charge.

By showing that the lender made an effort to be certain that the borrower has the ability to repay the loan, the lender in turn, receives certain legal protections.  Underwriting factors considered by the lender include:

  1. current or reasonably expected income or assets
  2. current employment status
  3. the monthly payment on the covered transaction
  4. the monthly payment on any simultaneous loan
  5. the monthly payment for mortgage-related obligations
  6. current debt obligations, alimony, and child support
  7. the monthly debt-to-income ratio or residual income
  8. credit history

For more information, see the Consumer Financial Protection Bureau fact sheet … protecting consumers from irresponsible mortgage lending.

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Act Decisively

Act Decisively

Whether it is hesitation or procrastination due to uncertainty, it can cost buyers by having to pay more for both the house and the financing.  This is one of those markets where most of the experts expect interest rates and prices will continue to rise through 2019.

The National Association of REALTORS? reports there is currently a 4.2-month supply of homes for sale which is close to the same as last year’s inventory.  Normal inventory is considered to be a 6-month supply.  In King County there is approximately a 1.7-month supply of homes.

If during the period you’re waiting to buy, the price of the home goes up by 5% and the mortgage rate (4.8%) increases by 1%, the payment on a $500,000 home with a 95% mortgage could be $434.27 more each and every month.  Over a seven-year period, the delay to purchase would total close to $36,500.

To act decisively, you need good information; a confused mind will not generally make a decision.  In today’s market, you need to know exactly what price home you can qualify for and you need to know what kind of home you can expect for that price.

You’ll want a housing and a mortgage professional you can trust to give you the information you need to make good decisions for yourself and your family.  We’d like to be your real estate professional and can recommend a trusted mortgage professional.

To get a better idea about what it may cost you for a home in your price range, use the Cost of Waiting to Buy calculator.  If you have any questions, call me at (206) 979-9632.

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Reducing Taxes When It’s Time To Sell

Overlooked Record keeping

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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.

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Get a CLUE on Home Insurance

Don’t Have a CLUE?
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If you haven’t heard of a CLUE report, it has nothing to do with the table game searching for a murderer. It is a report showing the insurance claims on your home and car for the past five to seven years.

This database is used by insurance companies to evaluate risks and determine rates. C.L.U.E. stands for Comprehensive Loss Underwriting Exchange. Rates can be increased not only due to legitimate claims but data entry errors also. Sometimes, simply asking a question without filing a claim can be logged as a claim.

For that reason, similar to verifying the accuracy of your credit report, it is important to check out the CLUE report on your home and car. The reports are free and there is a process for correcting mistakes.

An interesting and sometimes costly surprise occurs during the home buying process. The claim experience of the prior seller could impact the price of the premium of the new buyer. For that reason, you can ask for a copy of the CLUE report on the home you’re interested in buying prior to writing a contract.

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Rent or Own – That Is The Question

Owning Makes More Sense

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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.

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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 $112,000 in equity in seven years. Check out your own numbers using the Rent vs. Own or call us at (206) 979-9632. Owning a home makes sense and can be one of the best investments a person will ever make.