The Housing and Economic Recovery Act of 2008 authorizes a $7,500 tax credit for qualified first-time home buyers. To qualify for the credit, a home must be purchased between April 9, 2008 and before July 1, 2009, and buyers must meet income restrictions. This tax credit combined with still relatively-low interest rates and house prices at a 5-year low make now a great time to enter the real estate market for the first time!
Sphere: Related ContentEinstein called our income tax system "the most difficult thing to understand." That can't bode well for the rest of us, can it? But this year as we start to think about tax time many of those who took out a loan with mortgage insurance in 2007 are in luck.
Mortgage insurance will be tax-decuctible through 2010 assuming the following conditions:
1. A 100% deduction for households with an adjusted gross income of $100,000 or less. The deduction is reduced by 10% for each additional $1,000 of AGI, phased out entirely after $109,000.
2. Deduction applies to primary residences and second homes only -- so no help to investors.
3. The deduction only applies to loans closed in 2007. If you have a loan from 2006 with MI, there is no deduction available to you.
I'm a mortgage advisor, however, so don't take my word for it. Be sure to check with a tax accountant.
Happy New Year!
Here is an interesting article about options and considerations when purchasing a property for your college student to live in. In addition to helping your kids build a good credit rating early on, you can put them to work for you, and they’ll receive a crash course in home maintenance and being a landlord!
This can be a particularly good way to go if you have a student at Oregon State, as Corvallis real estate is relatively inexpensive, but still has a healthy appreciation forecast. The median price of a home in Corvallis is only $153,000! (Go Beavs!) And remember, if you purchase with the student as a co-owner, you’ll obtain an owner-occupied rate and won’t have to pay capital gains taxes when you sell four (or five or six?) years later.
I wonder if it's too early to send my six-year-old to college…
Grad Money Matters' post about mortgage and homeownership is mostly self-explanatory, but I have a few disagreements. It's worth reading just for the commenter that prompted an author correction (I agree completely with the commenter). Here's what I would add:
Myth 1 - ISPF says that it's untrue that "If I can afford the mortgage payments, I can afford to own the house." It is true that owning a home comes with maintenance expenses and likely higher utility bills, but the property taxes, home-owners insurance and HOA fees are all considered part of the mortgage payment from the lender's perspective. So if you can afford your mortgage payment (according to the old fashioned method of qualifying for a loan), you can probably afford the house in general.
Myth 2 -- ISPF says that you might not benefit on your tax return from owning your home. I know that this is a possibility, but it is so remote that it's really not worth mentioning. It actually happened to me once though. My husband and I have always lived well below our means, and when we bought our first house way back when, it was a teeny tiny little house for $80,000, and we did an adjustable rate loan at 5% interest. The interest we were paying wasn't even close to enough to effectively itemize. Still -- if you can find a house for $80,000 these days, let me know -- I'll take it, tax break or no. Also, even though we didn't benefit tax wise, we had a $650 mortgage payment (PITI) for four years and then sold the house for $110,000. MUCH better ROI than if we'd rented.
Myth 3 -- ISPF says that 40 or 50 year loan terms are not a good idea. I completely agree. Neither are 20 year terms usually a very good deal.
Myth 4 -- ISPF says not to enroll in a bi-weekly payment program. Absolutely. Why pay someone to do something for you that you can EASILY do for yourself? A variation on the bi-weekly program, if you make ONE additional principle payment each YEAR on a 30 year loan, your loan will pay off in the 22nd year. Another option is ask your loan officer to calculate for you a 15 year (or 10 year or however many years you want to pay it off) amortization and just pay that much every month. It's not that complicated, don't pay anyone to do it for you. I'll do it for you if you e-mail me.
Myth 5 -- ISPF says that fixed rate payments don't equate to fixed rate expenses. Well duh. However, what do you have to show at then end of ten years of giving your landlord $1000 per month? The answer is: nothing. A home is an investment -- renting is carefree in comparison, but that doesn't mean it's always financially savvy.
Myth 6 -- ISPF says that you don't have to have private mortgage insurance even if you don't put 20% down. This is sort of true. Most people have been doing "piggyback" loans the last five years or so. However, many lenders have stopped funding second mortgages altogether. Since all of the chaos happened this summer, I haven't done a piggyback loan, but I'm sure they'll come back around. Also, for people earning less than $100,000 per year, mortgage insurance is now tax-deductible, so it's not always worth the hassle (or expense) of avoiding it.
Myth 7 -- ISPF says lenders can amortize your loan on a refinance so that you will still pay the loan off at the original date. This is true of a "streamline refinance," and it can be done on a regular refinance, but I've never had anyone ask to do it.
Myth 8 -- ISPF says shopping for a mortgage at multiple places only counts as one inquiry on your credit report for credit scoring purposes. It's the truth. Same is true if you've been all over town shopping for cars this week.
Myth 9 -- ISPF says you should get pre-approved for a loan FIRST, then shop for a house. YES! It's a rare real estate agent who will take you shopping for a house if you haven't been qualified by a lender anyway.
Myth 10 -- ISPF was spreading that tired old rumor that "the bank owns your house." But was big enough to retract when the error was pointed out.
Do you borrow as much money against your home as possible or make the largest down payment you can? Do you pay over 30 years or condense into 15?
The answer to those questions depends largely on who you ask. Due, in large part, to the number of people who are in debt up to their eyeballs these days, there’s no shortage of financial gurus who encourage people to shun debt of any kind, including mortgage debt. This can be a fine option, but tying up all of your cash in your primary residence also limits your ability to make other investments.
People who have grown businesses from the ground up understand the principle of leveraging. No matter how much new business owners make, (if they’re smart) they’ll be stretching all of that money to acquire more money-making business assets. What that means if you’re the spouse of said business owner is that you’re doing very well financially, but this is not the year you’ll finally be seeing Europe. Sorry.
Then again, most start-up companies fail. And, understandably, most people think of their homes as a place to keep safe from financial risk as opposed to a tool for achieving financial goals. But home equity, while certainly not a bad thing to have, has a zero rate of return.
What becomes important in terms of accumulating wealth is what you do with the money you didn’t use for a down payment (or the money you withdrew from that equity line of credit). More often than not, that money can be invested with a return that is greater than the cost of the debt against your house. But if you’re spending it all at the mall, obviously you won't be better off in the long run.
Having no debt can be liberating and free up cash flow for other investments, but it doesn’t give you a better return on your investment. So really, if you’re taking a disciplined approach, either way can work out well for you in the end, but you can build wealth more quickly if you leverage the equity in your home.
During the Great Depression, when banks were going belly-up, they "called" their outstanding loans, which means that people who had mortgaged their houses were suddenly required to pay the loans in full or lose their homes. As a result there's a persistent belief out there even today that if you have a mortgage against your house, you don't actually "own" it -- the bank does. But that just isn't true. The bank doesn't own your house. And trust me, the bank doesn't want to own your house either.
This "depression mentality" is the origin of the old adage, "don't bet the farm." But today lenders can not require you to pay your loan in full before it matures, no matter what predicament they find themselves in. And as a result, when mortgage interests rates are relatively low, "betting the farm" can be a useful tool in accomplishing your financial goals, like sending your kids to college or saving for retirement.
Another psychological aspect to how we save, spend and invest money has to do with where the money came from and how long we've had it. This is a fascinating topic explored in the book Why Smart People Make Big Money Mistakes, and it explains why some people would choose to pay down a mortgage loan that is costing them 5.5% instead of investing the same money in an asset that could earn them an 8% return.
This psychological issue comes into play often with 401Ks. Everyone can pretty painlessly save money in a 401K, because they never see the money. It's easier to just have someone not give it to you, then it is to touch it, feel it and then put it away somewhere and not touch it again.
For me, my mortgage payment has this interesting psychological aspect. For instance, I might think, should I put this $50 in my kids' college funds this week, or should I take them to the movies instead? But I never think, gosh should I take the kids to Disneyland or should I make the mortgage payment? It can be hard to save as much as we should, but we don't generally put our family's immediate well-being at risk.
A year ago, we had a client who had enough equity in a rental property that he refinanced it and pulled enough cash out to fully fund his kids' college accounts, by calculating how much he needed to put in them now for them to grow to the projected amount that will be needed. So instead of socking away a certain amount every month into college funds, he has a mortgage that he doesn't notice (because his renter makes the payment and the college fund return is greater than the interest he pays on the loan).
Some financial advisors might disagree, as some believe that paying interest is always negative, but tax deductible interest can actually help you achieve your longterm financial goals while maximizing your current cash-flow. If you have equity in your home, you might as well let it work for you.
