A home could very well be the most valuable asset you’ll own. And with any asset, there are pitfalls to avoid as well as advantages to make use of. Let’s start with the mortgage. Here are some very common mistakes buyers often make.
Fees: Comparing the annual percentage rate (APR) is a tool many buyers
use to compare rates when shopping around. The federal government mandates
mortgage lenders to disclose certain fees in their good faith estimate
of closing costs since the APR is affected by these fees. However, there
are many fees that mortgage lenders are not federally mandated to disclose
which you should be aware of.
According to Fed Governor Edward M. Gramlich in testimony before Congress last year, APRs currently omit credit report fees, appraisal and survey fees, lender’s inspection fees, pest inspection fees, document preparation fees, and fees for credit, life and disability insurance.
You can often reduce the cost of survey fees by locating the person who previously surveyed the property and requesting an update, rather than pay for a new one. The Department of Housing and Urban Development advises comparing rates among various title insurance companies. Ask what services and limitations on coverage are provided under each policy. It may be possible to get a less expensive “reissue rate” if a property has changed hands within the last several years. Look for fees for locking in a rate. Does the rate automatically include credit insurance? Sometimes, the insurance is unnecessary or available cheaper elsewhere. You may be able to eliminate application, underwriting, and Federal Express fees simply by questioning them or mentioning competitors who don’t charge for them.
Understanding Mortgage Programs: There are two basic types of mortgages: fixed-rate and adjustable-rate. There are also many flavors of these two types. With any adjustable rate mortgage, it’s critical to monitor rate caps and rate floors – per adjustment and lifetime. Also, don’t pay a fee to convert a mortgage to biweekly payments. Unless there is a prepayment penalty, you can do this yourself thereby saving many thousands of dollars of interest over the life of the mortgage.
Checking Your Credit Report: Prior to applying for a loan, you should get copies of your credit reports to see if there are any mistakes or issues that might concern your lender. If there are problems, and the mortgage process takes longer than your lock-in period, you would have to reapply all over again. If rates have increased, that could be bad news.
Understand Your Lender: If you want to refinance your current loan which is held by a thrift institution, that lender may be willing to do a straight loan modification rather than require you to refinance the whole loan. This will save you time and fees. If you wish to negotiate rates or fees, or you need quick service, you may have more clout with a lender who actually uses their own money rather than a mortgage banker who shops around for a mortgage for you.
Mortgage Tax Consequences: Tax-deductible interest on a second dwelling is limited to a debt of $1.1 million - $1 million on a mortgage and $100,000 home equity debt combined. For interest to be tax-deductible, debt must be secured by a personal residence, but that can include second homes and houseboats. Tax problems can arise if you refinance more debt than there is equity in a home unless the additional debt is for home improvement. Make sure the additional refinanced debt is arranged as a home equity loan. The problem with a line of credit is that the repayment term often is short and you may not be able to pay it back in that time frame.
|Under Internal Revenue Service
regulations, mortgage or home equity loan interest is deductible only if
“home equity indebtedness does not exceed the fair market value of a residence”
to $100,000. If you have a house worth $150,000 with a mortgage of $100,000,
banks may be willing to lend up to another $100,000, but the interest deduction
will be based on $50,000.
If you are refinancing for a second time, you are entitled to an often overlooked special break. You can write off the balance of unamortized points remaining from the first refinanced loan entirely in the tax year of the second refinancing.
If you are retired and need more income, the equity in your mortgage-free home is a possible resource. A reverse mortgage works much like a standard mortgage loan, only in reverse. A reverse mortgage makes it possible for you to convert some of your home equity into spendable cash while you retain ownership of your home.
The reverse mortgage loan is paid out to you in monthly installments or on a line-of-credit basis over a number of years. You are not required to pay back any of the monthly loan advances or interest until the loan term is over. At that time, you must repay all the loan advances plus interest. In most reverse mortgages, no repayment is due until you die, sell your home, or permanently move away.
The amount of money that can be paid out in monthly loan advances is related to the amount of equity you have in your home, the interest rate on the loan, and the term of the loan. You can prepay the loan at any time without penalty. You keep the title to your home. The lender does not become an owner of your property. However, if you (or your heirs) fail to repay the loan when it becomes due, then the lender has the right to foreclose and force you to vacate the premises. If you decide to take advantage of the reverse mortgage, be sure to only use a Federal Housing Administration (FHA) approved and insured lender.
Homeowners Insurance: You may notice on the annual bill you receive from your homeowner’s insurance company that the insurance keeps rising. Typically, this is because the insurable amount is automatically increased every year to keep up with the presumed increase in your home’s worth. However, the initial amount may have been too high to start with, or the automatic percentage increase is higher than the actual home value increase. I’ve seen cases where the insurance presumed a value of the house over $50,000 higher than the actual appraised value. You can direct your insurance company not to increase the amount. You can continue to do this until the amount more accurately reflects the true value of you home. Additionally, mortgage lenders typically only require the insurance amount to equal the amount of the mortgage, not the appraised value. The mortgage lender is only interested in the amount of their money they have at risk on your house. If your homeowner’s insurance guarantees the replacement value of your home, you may be over-insured.
Nowadays, many people use parts of their home for business. Thanks to a recent change in the tax law, more people may now be able to claim home-office deductions on their income taxes. Activities that qualify are: preparing customers’ bills, keeping books and records, ordering business supplies, setting up appointments, forwarding orders or writing reports. Additionally, the IRS says that in some cases, these activities can be performed both at your home and at other locations without disqualifying your home as your principal place of business.
There are times when you may not want to take a deduction. The capital-gains tax exclusion may outweigh the benefits of the home-office deduction if you plan to sell your home within the next few years. The IRS says that any portion of your home used as an office for more than three of the five years prior to the sale, is not part of the residence for purposes of applying the exclusion. To make matters worse, depreciation claimed after May 6, 1997, for the part of your home that was your home office, will be taxed at 25%, rather than the 20% rate that generally applies to capital gains.
A comprehensive financial plan reviews, and makes specific recommendations about, all aspects of your financial situation, not just investments. This way, your finances work together efficiently and effectively – a great way to start the new century.
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