Archive for Home Mortgage
FHA Fees Going Up April 1st
FHA has raised the annual Mortgage Insurance Premium to 1.25% beginning April 1st. MIP is required on all FHA loans and used to fund losses by lenders for borrowers who default on their mortgages. As of June 1st, FHA loans in excess of the standard maximum of $625,500, in high-cost areas, will have a premium of 1.5% of the loan amount.
In addition to the increase in the annual MIP, FHA also announced it plans to raise the fee on the up-front MIP from 1.00% to 1.75%. No date was reported for its implementation.
The bottom line will result in a borrower’s payments going up. However, it might not be restricted to the MIP. Freddie Mac’sPrimary Mortgage Market Survey showed that both 30 year and 15 year mortgages have gone up too.
One way to avoid the increase is to have a completed sales contract and have your lender order the FHA commitment prior to April 1, 2012. If you plan on buying a home this spring, there is a reason to do it earlier rather than later.
Great Investment
If you invest in a savings account, you’ll make less than 1% and will have to pay income tax on the earnings. On the other hand, contribute something extra to your house payment on a regular basis and you’ll essentially, earn at the mortgage interest rate which is certain to be more than you’re earning in the bank.
Making additional principal contributions on your mortgage will save interest, retire debt and build equity. An extra $100 a month in the example shown will save thousands in interest and short the term of the mortgage as well.
Reducing your cost of housing is another way to improve the investment in your home. Becoming debt-free is a worthy goal that is achieved with discipline and good decisions. Suggestions like this are part of my commitment to help people be better homeowners when they buy, sell and all the years in between.
Risk Determines Rate
Regardless of what a lender quotes on mortgage rates, the actual rate paid by a borrower is based on a number of variables. Lenders determine whether to loan money and at what rate based on the risk involved with the transaction.
Factors that increase the risk that the loan will be repaid will proportionately increase the interest rate charged to the borrower. If the risk becomes too high, the loan will not be approved.
- Loan amounts – conventional loans for more than the conforming limits set by Fannie Mae are considered jumbo loans and generally have a higher interest rate.
- FICO score – the lowest interest rate is reserved for the highest credit scores; the lower the score, the higher the rate borrower will pay.
- Occupancy – borrowers occupying a home as their principal residence are considered a better loan risk than second homes and investment properties.
- Loan purpose – purchase transactions generally have the lowest interest rate while refinancing a home is generally higher.
- Debt-to-Income ratio – a borrower’s monthly liabilities divided by their gross monthly income develops a ratio that helps lenders to assess the borrower’s ability to repay the mortgage.
- Loan-to-Value ratio – the lower the percentage of the loan to the appraised value of the property will generally lower the interest rate.
Deductible Points?
Points refer to prepaid interest on a home mortgage and can be fully deductible by the buyer in the year paid if the right conditions exist. The points must be used to buy, build or improve a taxpayer’s principal residence but not all fees charged by the lender are necessarily deductible.
According to IRS Publication 936, “The term ‘points’ is used to describe certain charges paid, or treated as paid, by a borrower to obtain a home mortgage. Points may also be called loan origination fees, maximum loan charges, loan discount, or discount points. A borrower is treated as paying any points that a home seller pays for the borrower’s mortgage.”
If you purchased a home in 2011, have your tax professional evaluate your closing statement to see if there are loan fees that may be used as a deduction on your tax return regardless of whether you or the seller paid them.
Refinancing a principal residence or purchasing an investment or income property require that points must be deducted ratably over the term of the mortgage rather than deducting them fully in the year paid. Borrowers in these situations should consider the benefits of lower interest rates from paying point to higher interest rates without points.
This article is meant to provide information that can be discussed with your tax professional about your specific situation and is not to be considered tax advice.
Choose Your Deduction
One third of all U.S. households, 75% of households with more than $75,000 income and most homeowners itemize their deduction on their federal income tax returns. It makes sense because the interest paid on their mortgage and their property taxes probably exceeds the allowable standard deduction.
However, with interest rates as low as they have been in the last two years and the price of homes having come down considerably, it is possible that the standard deduction may be the better choice.
Each year, the taxpayer can compare the total of the itemized deductions to the standard deduction to select which method will result in the most benefits. The 2011 standard deduction is $11,600 for married couple filing jointly and $5,800 for single filers.
The Housing and Economic Recovery Act of 2008 allows homeowners to take the standard deduction and the lesser of their actual property taxes of $1,000 if filing their return married jointly. For more information, see Schedule L found on www.IRS.gov and consult your tax advisor.
Home Buying Homework!
The Best Way Home
“It’s not far, if you know the way.” Maybe it is an obvious statement but there are some definite steps that will improve your success in buying a home in today’s market.
- Know you credit score – the best mortgage rates are available to borrowers with the highest scores. Unless you know what your credit score is at all three major bureaus, you don’t really know what rate you’ll have to pay.
- Clean up your credit – it is estimated that about 90% of credit reports have errors. Some are not serious but others could affect a borrower from getting the best loan terms. It is your responsibility to know what is on your different reports and correct them if possible. You’re entitled to a free copy of your credit report each year from Experian, Trans Union and Equifax.
- Get pre-approved – Taking the time to make a loan application with a qualified lender even before you start looking at homes will provide peace of mind, make sure that you are looking at the “right” homes and may help you negotiate the best price on the home you select.
- Do your homework – when you find the home that meets your needs and desires, research the tax assessments, school ratings, crime activity, possible zoning changes and comparable sales in the area.
As your real estate professional I can definitely help you with these important strategies to invest in a home to call your own, raise your family, feel safe and secure and share with your friends. Call for a recommendation of a trusted mortgage professional; there really is a difference.
Waiting To Buy Might Cost MORE!
The housing market has been in a downward trend for four years. There is some speculation that inventories will not reduce any time soon which will be necessary for prices to rise. Texas and Austin, in particular, have been spared the worst. However, there are other factors that can increase the cost of housing, specifically mortgages. FHA accounts for a large percentage of the current housing loans and is expected to be even more prominent when the Qualified Residential Mortgage Guidelines go into effect next year.
- Rising rates are almost certain, due to looming inflation fueled by higher gas and food prices and the enormous amount of deficit spending
- FHA loan limits have been reduced – they are lower than conventional limits in most markets and FHA has suggested that they might be reduced further.
- FHA might increase the down payment to 5% or higher in an effort to have a more secure loan that will have less likelihood of going to foreclosure.
- FHA might decrease the amount of seller contributions in a similar move to require the buyer to have a larger investment in the home and therefore be a more “qualified” borrower.
- Congress may decide to increase the up-front MIP to build up the FHA reserves. The annual MIP has been adjusted twice since October 2010 when the Up-Front MIP was actually reduced.
- Due to tougher conventional requirements, demand for FHA loans could exceed maximum annual insurable limits. If Congress is having a hard time raising the limit on national debt, they might not even consider raising the limits for FHA.
In an effort to solidify the lending industry, qualifying is becoming harder for the buyer and more expensive at the same time. Many of the rules changes could go into effect next year. In addition, market factors could easily play a role in increasing buyer’s costs. Waiting will very probably require a larger up-front investment for buyers in the future.
One Size Does Not Fit All!
One Size Doesn’t Fit All
Rarely, does one size fit everyone and the same goes for advice. The following suggestion is not right for everyone. However, for people with job security and who don’t own a home; for people with good credit and enough savings for a down payment, there may never be a better time to buy a home.
Homes have had a significant price correction but in many markest, they have started to rise again. The lower prices combined with historically low interest rates make this an opportune time to buy a home if you can afford it.
One of the reasons homes are an attractive investment is that fact that you can use a small down payment and finance the balance for 30 years. The principle, called leverage, allows you to earn a return on the value of the home rather than the actual cash investment. Small appreciation can create a large rate of return on the initial investment of the down payment and closing costs.
The following example is a projection at the end of five years for a $175,000 home with 3% closing costs and a 5% interest rate for a 30 year term. The rate you see in each column is an annual rate of return based on the equity of the home at the end of the five year period due to both appreciation and amortization of the loan.
The nature of positive leverage will cause the returns to be higher with a smaller down payment. As you see in the table, the return is higher on the 3.5% down payment than with the 10% or 20% down payment.
If you’re curious to see if this advice might fit your situation, you really need to sit down with a knowledgeable real estate professional who can help you assess your position. It’s worth the time because there may never be a better opportunity than now.
