An oft-touted benefit of homeownership is its tax benefits.  However, like most IRS-related items, understanding how the benefits work is not always clear.

In general, homeowners are entitled to two home-related tax deductions — one for annual mortgage interest paid, and one for real estate tax bills paid.

Not everyone is eligible, though.  Some of the exclusionary traits include total amount borrowed, and whether or not the home is a primary or secondary residence.

The official IRS publication is filled with notes and explanations but, in general, you can calculate your approximate mortgage interest tax deduction using the following math:

1. Sum your annual mortgage interest and real estate taxes paid
2. Find your tax rate on the IRS tax bracket schedule
3. Multiple your tax rate by the sum from Step 1

This is grossly simplified, but fairly accurate.

As an example, a homeowner paying a combined $20,000 in 2008 mortgage interest and real estate taxes, and who is in the 28% tax bracket, may be due $5,600 in tax credits.

The availability of mortgage interest tax deductions is one reason why loan officers make reference to “after-tax mortgage rates”.  An after-tax mortgage rate is effective interest rate, post-tax code, and can be calculated using the formula below:

(After-Tax Mortgage Rate) = (Mortgage Rate) * (1 – Marginal Tax Rate)

The same homeowner with a 5.000% mortgage rate, therefore, has an after-tax mortgage rate of 3.600%.

Because not every homeowner is eligible for home-related deductions, and because not every homeowner should claim them, talk with your personal accountant before making any tax-related decisions.

Even though its effective date is April 1, 2009, mortgage applicants should start seeing Fannie Mae’s new fee structure from lenders beginning this Monday, January 12.The reason why Fannie Mae’s mandatory loan fees are hitting lender pricing so far in advance is because lenders can take up to 30 days to package and sell a loan to Fannie Mae post-closing.  In effect, this moves the April 1 start date to March 1.

Then, figuring that March 1 is roughly 45 days from now and that 45 days is a normal window on which to close on a home or on a refinance, the start date again pushes back, this time to January 15.

Given lenders’ typical timeframe to close, fund, and sell a loan to Fannie Mae, in other words, it’s normal that pricing reflects the fee changes two-and-a-half months in advance.  Homebuyers and would-be refinancers would do well to take notice.

If you are floating a mortgage rate today — or shopping for one — consider locking it in before the close of business.  Effective Monday, any number of traits in your home loan could increase your closing costs:

• Your credit score
• Your downpayment / equity percentage
• Your home’s property type
• Your reason for wanting a mortgage
• Your loan type

For a complete look at Fannie Mae’s new, mandated loan fees, visit the Fannie Mae web site.  If you have trouble interpreting the worksheet, call or email me and we can talk about it together.

In late-November, the Federal Reserve pledged $600 billion to buy mortgage-backed securities.  The announcement drove down mortgage rates and started the Refi Boom.Then, the Federal Reserve made a second series of statements after its scheduled meeting last Tuesday, causing mortgage rates to plunge again.  This started the Refi Boom’s second wave.

Because of the surge in refinance activity, mortgage lenders are “backed up”; initial file reviews are taking up to 12 business days in some cases.

Typically, this process takes 2 days.

Underwriting delays are problem for refinancing Americans because when a mortgage rate is locked, it’s most often locked for 30 calendar days — the standard Rate Lock Agreement contract length.  If the mortgage doesn’t close within those 30 days, the applicant must either pay an “extension fee” to preserve the lock, or risk losing the rate altogether.

30 days may seem like a long time, but let’s consider a few external variables:

• December 24, 25, and 26 plus January 1 and 2 are lost to holiday
• December 27, 28 plus January 3, 4, 10, 11, 17, and 18 are lost to weekends
• January 19 is lost to federal holiday
• 3 days are lost to the Right To Cancel clause

This leaves 13 days to get from Application to Closing, and of those 13 days, 12 of them are being spent on the initial review.  A 30-day rate lock, in other words, may be an inadequate agreement with some mortgage lenders.  A 45-day agreement may be required instead.

Typically, 45-day rate locks carry higher rates or higher fees, versus their 30-day counterparts.  This amounts to a “tax” on borrowers, a result of the nation’s rush to refinance en masse.

As always, the best way to preserve a rate lock is to be as responsive as possible to the process.  Return paperwork when asked, schedule appraisals immediately, and arrange to signing closing paperwork on the first available day.

With mortgage rates low, application volume — and underwriting turntimes — should remain high into early-2009.

During the holiday season, retailers bombard shoppers with at-the-register offers to “open a charge card and save 15%”.It’s an immediate money-saver, but for Americans in the market for a new home loan, taking advantage of the in-store savings could be a long-term loser.

This is because new credit card applications are damaging to credit scores.  According to myFICO.com, “new credit” accounts for 10 percent of a credit score; recent applications may signal weakness in a borrower’s profile.

Meanwhile, conforming mortgage lenders make rate adjustments for low credit scoring applicants.  As an example, a home buyer with a 20 downpayment and a 715 credit score would face an interest rate adjustment of 0.125%.

Below 700, the adjustments are even worse.

It’s okay to take advantage of in-store savings during the holiday season, but be aware of how it may impact your credit score.  If you’re not applying for a new home loan in the next six months, chances are that you’ll be alright.

But, if you will need a new home loan, consider whether saving 15 percent on a $200 purchase is worth it if the long-term cost is paying an extra 0.125 percent on your new mortgage.

(Image courtesy: myFICO.com)

A mortgage is a contract between a bank and borrower, defining the terms by which a home loan must be repaid.The paperwork, signed by both parties, includes provisions for things like:

• The interest rate
• The length of the loan
• The amount of money to be borrowed

But, like all loans, a mortgage loan can be paid off at any time.  So, when market interest rates fall, homeowners will often exercise their right to an “early payoff” by securing a new loan that pays off the old one.

This process is most commonly known as a refinance.

A refinance is the changing of the loan terms against a property, often for a better interest rate or a lower monthly payment.  When the refinance process is complete, the original lender’s loan is paid in full using the money from the new lender’s loan and the former’s relationship is officially terminated.

There’s no rule against how many times a person can refinance, nor is there an easy way to determine whether or not a refinance makes sense.  In general, if you can reduce your monthly payment while limiting your closing costs, to refinance is a smart decision.

However, there are other reasons to refinance, too, including:

1. To convert from an ARM into a fixed rate mortgage (or vice versa)
2. To extract equity for paying off third-party debts or for cash
3. To extend a loan from 15 years to 30 year for payment relief

Because there are fewer third-parties involved with a refinance, it’s often simpler and less expensive than a comparable purchase transaction.  The paperwork stack is often smaller, too. Depending on your credit score, relative LTV (loan balance divided by the worth of your home) and the loan product that best suits your situation, rates have been as low as 4.75% this week.  Call or email us to see if a refinance would make sense for your family!

It’s the age-old question for home buyers in need of a mortgage:

Which is better: Fixed or ARM?

Historically, the answer has hinged on a homebuyer’s desire to meet one of two mutually-exclusive mortgage financing goals:

1. Get low mortgage payments for better cash flow
2. Get long-term payment stability for better budget planning

But because of government intervention and lingering questions about the economy, fixed-rate mortgages are now pricing cheaper than their adjustable-rate counterparts.

Based on today’s mortgage market, therefore, home buyers can get both.

Versus a comparable 5-year ARM, conforming fixed-mortgage rates are priced roughly 0.250 percent lower and have been over the past 19 days.  The quarter-percent difference equates to $33 saved per month on a $200,000 home loan.

Mortgage markets are ever-changing so rates we can’t know if this pricing anomaly will last.  But, while it does, the decision to choose Fixed over ARM is a lot simpler.

For most Americans, mortgage interest paid on a home loan is tax-deductible in the year in which it was paid.With advance planning, therefore, homeowners can increase their 2008 tax deductions and limit their tax liability on April 15.

The key is to make the January 2009 mortgage payment before the New Year begins.

In making the payment in 2008, the payment’s mortgage interest is applied against this year’s tax deductions instead of next year’s.  And lest you think you’re paying “in advance”, remember that mortgage interest is paid in arrears; a payment due January 1 accounts for interest that accumulated in December 2008 anyway.

Tax planning is a complicated issue and not all homeowners will qualify for mortgage interest tax deductions. Check with your tax professional before making tax planning decisions.

If you don’t have an accountant you trust, call or email us anytime; we’re happy to make a recommendation to you.

In a week in which mortgage markets struggled to find direction, mortgage rates edged higher overall.  The weekly increase was the first since mid-November and it may signal higher rates as we head into 2009.The week’s most talked-about story hit the wires Friday.

According to the government, the U.S. economy shed 533,000 jobs last month and the national Unemployment Rate rose to 6.7%.  This was the largest number of jobs lost in any one month since the recession of 1974.

In a normal market, job losses of this magnitude would have caused stock markets and mortgage rates to fall.  But stocks and rates didn’t fall Friday.  To the contrary, both rose.  This is because — while the jobs reports was the most talked-about story last week — it wasn’t the most important one.  That story had already been told.

Last Monday — officially — we learned that U.S. economy is in recession.

Although most of Wall Street knew it already, the official determination was an acknowledgement that “bad economic data” is not only acceptable, but normal given the current conditions.

In other words, when the jobs data was released Friday morning, one reason why mortgage rates rose was because markets somewhat shrugged off the data, saying: “Yeah, of course job losses are up – we’re in a recession, after all.”

This is an unfortunate development for rate shoppers because bad data usually anchors mortgage rates lower.  Going forward, that won’t likely be the case — at least until the recession is declared to be over.

This week, without much new data being released, markets should trade largely on news of federal intervention and expectations for the U.S. economy.  As retail sales figures drip in from the weekend, be wary of stronger-than-expected numbers as that could pull mortgage rates higher.  The same goes for Friday’s official Retail Sales data for November.

Either way, expect volatility throughout the week — same as we’ve seen all year long.

(Image courtesy: Wall Street Journal Online)

The day after Thanksgiving is a busy shopping day nationwide and, this year, analysts are paying extra attention to sales figures.Dubbed “Black Friday” in reference to red ink representing loss and black ink representing gain, today’s start to the Holiday Shopping season is believed to be the day that retailer balance sheets finally cross over to profitability.

But the accounting connotation of the phrase “Black Friday” wasn’t its original usage – it’s a media-coined term.

When the phrase was first used in Philadelphia in 1975, it was in reference to the day after Thanksgiving being the busiest shopping and traffic day of the year.

There’s other Black Friday trivia out there, too:

Did you know? Black Friday is neither the largest, nor the most profitable, shopping day of the year.  Contrary to popular wisdom, it’s the 5th biggest, not the first.  The two weekends before Christmas are usually the “biggest” series of days.

Did you know? In an attempt to spur the economy in 1939, President Franklin D. Roosevelt proposed to move Thanksgiving ahead by 7 days.  7 more days of shopping, he thought, would help retailers and help the economy.  Eventually, the idea dubbed “Franksgiving” failed.

Did you know? To protect competitors from price matching “deals”, some retailers copyright their Black Friday advertising.  Others won’t print prices at all.

Did you know? Last year, 14 percent of Black Friday shoppers had made a purchase prior to 4:00 A.M. with an average ticket of $347.

Black Friday is of special significance this year because consumer spending accounts for two-thirds of the U.S. economy.  If Americans are shopping in full force, expect economic optimism and a mild rebound in the stock market.  Unfortunately for home buyers, this should also lead mortgage rates higher.

By contrast, if sales figures are weak, expect talk of recession to grow.

Sources
Black Friday (Shopping)
Wikipedia

http://en.wikipedia.org/wiki/Black_Friday_%28shopping%29

Geek Trivia: Early bird special
Tech Republic
Jay Garmon, Nov 22, 2005

http://articles.techrepublic.com.com/5100-10878_11-5958978.html

(Image courtesy: Give Congress Back)

To help demystify the mortgage process, the federal government is giving the much-maligned Good Faith Estimate document a makeover.  Effective January 1, 2010, the current, 2-page form will be replaced by a new, easier-to-understand version, spanning 3 pages.

The biggest strength of the new Good Faith Estimate is that it uses everyday English to explain how the mortgage works.  For example, in one section titled “Loan Summary”, the Good Faith Estimate specifically answers:

• What is your interest rate?
• Can your interest rate rise?
• Does your loan have a prepayment penalty?

Using today’s disclosures, the answers are spread across 3 separate forms.

In addition, the new-look Good Faith Estimate identifies what charges are legally allowed change at the time of settlement, and how a mortgage applicant can opt for higher fees in exchange for a lower mortgage rate, and vice versa.

These educational elements are lacking from the current model.

But for all of its clarity, the Good Faith Estimate doesn’t address the issue of suitability.  As in, is this the right loan for the right borrower?  The new Good Faith Estimate won’t prevent homeowners from choosing “bad loans” — it will only educate them about the loan’s facts.

For suitable advice — as always — talk with a trusted mortgage professional who will both listen to your needs and help you make plans for them.  Getting the “best terms” on an unsuitable loan can be far worse that getting great terms on a loan that fits.