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How to Take a Home Office Tax Deduction When You Work From Home

February 18, 2020

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Of all the tax breaks available, the home office tax deduction is among the murkiest and most misunderstood. And the passage of the 2018 Tax Cuts and Jobs Act has made things even more complicated.

So if you work at home, what should you do? Allow us to explain exactly who can take the home office tax deduction these days—and who can’t—as well as how to do it right. Here’s what you need to know before filing this year.

Who can claim the home office tax deduction?

We’ve got some good news and bad news. The bad news? In years past, if you worked for a company (and received a W-2) but worked from home occasionally or full-time, you could claim a home office tax deduction. But not anymore.

“There is a major change to the home office deduction: It is no longer available for company employees,” says Bill Abel, tax manager at Sensiba San Filippo in Boulder, CO. “This has many remote employees frustrated.”

But there is a ray of hope for these W-2 telecommuters. You could see if your employer will allow you to change your work status from an employee to an independent contractor (also discuss this option with a tax adviser), which would allow you to continue taking this deduction. Consider the pros and cons of such a move beyond just the tax benefits, however.

Another small loophole also exists, if your employer is willing to play along: Just ask your employer to set up what’s called an “accountable plan.”

For example, instead of being paid $100,000, your employer could pay you $95,000 in wages plus a $5,000 home office expense reimbursement, making your salary the same—while saving you more on taxes.

As for the good news? If you’re one of the 40 million or so people out there who are self-employed—from business owners to bloggers—you can still continue to take this deduction.

How to take a home office deduction if you’re self-employed

If you’re self-employed, you have every right to take a home office tax deduction, but that’s not to say it’s easy.

In a nutshell, you’ll be writing off part of your home expenses on your tax return by separating out the costs associated with using your home for personal purposes (making pancakes) and business (answering work email).

To claim the deduction, an area of your home has to be designated as your principal place of business, and—the clincher—used exclusively for work. Everything in that designated space needs to be for work purposes only.

What makes an office an office?

To be clear, that room you work in which doubles as a guest room when mom visits won’t pass muster, even if you spend 40 hours a week there, says Abby Eisenkraft, a financial expert and author of “101 Ways to Stay Off the IRS Radar.” So if you really want to do things right, have mom sleep on the couch!

If, say, your desk is parked in a corner of your bedroom or part of an open floor plan, simply measure the space you use for your office, whether or not there are walls.

The key is that the area must be used only by you, just for work—not to peck out personal email. To make that delineation easier, you can even put up a physical barrier like a partition or shelves.

And according to the IRS, an office can also be a “separate free-standing structure, such as a studio, garage, or barn.”

How to claim a home office tax deduction

The IRS offers two ways to calculate a home office tax deduction, one simple, the other a bit more involved, says Jeff Morris, accounting partner at Nathaniel Jacobson, serving Maryland and Washington, DC.

The simple method: Figure out the square footage of your home that you use for business purposes. Each square foot you use for work is worth $5, and you can claim up to 300 square feet, for a maximum annual claim of $1,500, says Morris.

The complicated method: Track all the costs of your home (think maintenance, insurance, repairs, utilities, etc.) and depreciation (normal wear and tear).

Next, separate and allocate those expenses based on the percentage of the home you use solely for business purposes. So if your office space breaks down to 10% of your home’s total square footage, you can deduct 10% of your home costs—which could add up to a sizable chunk of change. The key to using this deduction is keeping careful records.

Isn’t the home office tax deduction a red flag for an audit?

Nope. In fact, the IRS simplified their method of measuring out your office space to take the audit scare out of the home office tax deduction.

“This might surprise some people, given the fear of an audit that the home office deduction used to strike in the hearts of many taxpayers,” says Morris.

The reality is that the deduction is becoming increasingly common, and it doesn’t make a taxpayer any more susceptible to an audit than any other deduction a small-business owner may take.

The post How to Take a Home Office Tax Deduction When You Work From Home appeared first on Real Estate News & Insights | realtor.com®.

Mortgage Rates Are at 3-Year Lows—Here Are 5 Questions to Ask Yourself Before You Refinance

February 12, 2020

Couple on the sofa

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Mortgage rates are resting near record lows — and that’s spurring a wave of refinancing activity as Americans look to take advantage of the savings a cheaper interest rate could bring.

Refinance loan volume jumped to the highest level since 2013 last week, especially among jumbo mortgage borrowers, on the heels of lower mortgage rates, according to data from the Mortgage Bankers Association. The average interest rate for a 30-year fixed-rate mortgage fell to 3.45% last week, Freddie Mac  reported, the lowest level since October 2016.

More than 11 million homeowners stand save to an average of $268 per month on their mortgages if they were to refinance at today’s rates, real-estate data firm Black Knight reported.

“Almost anybody should be checking if there’s an opportunity to refinance,” said Tendayi Kapfidze, chief economist at LendingTree. “It doesn’t cost anything to talk to a lender and see what rate they might get you in this marketplace.”

But refinancing isn’t foolproof. Taking out a new home loan can cost you thousands of dollars in fees. And making the wrong choices can significantly reduce your potential savings. Here are five questions homeowners should ask themselves before taking the plunge with a mortgage refinance.

How long will I stay in this home?

Mortgages are paid out over the span of many years, and during the initial period most of your payments will go toward the interest rather than the principal owed on the loan.

As a result, time is one of the most significant factors in determining whether a refinance makes financial sense. “You want to keep the loan long enough for the monthly savings to exceed the closing costs — that varies a lot depending on the fees,” said Holden Lewis, mortgage expert at personal-finance website NerdWallet.

Homeowners who are planning to move to a new house in the next five or so years may actually save more by sticking with their existing mortgage rather than refinancing, given the fees you have to pay the lender.

On the flipside, people who are in their forever homes could benefit from taking out a 15-year loan rather than a 30-year loan, Lewis said. The average interest rate on the 15-year fixed-rate mortgage is typically lower than the 30-year loan — it currently stands at 2.97%. So while these loans require larger monthly payments, the aggregate savings are greater.

A 15-year loan also would allow the homeowner to build equity faster, which they could then tap through a home-equity loan further down the road if unexpected expenses arise.

How much will I save?

To save money with a refinance, the general rule of thumb is that the new interest rate needs to be 50 basis points lower than your current one, Kapfidze said. But when looking at the average rates reported by Freddie Mac, it’s important to remember that the rates offered by lenders can be even better.

“Because typically a lot of the rates you see are average rates, it means that half the rates are below that,” Kapfidze said.

Comparison shopping, as a result, is critical in order to score the best deal. Lenders don’t just compete on interest rates. They also can adjust how much you spend in closing costs. Another factor that can shift overall savings is the discount points — these are fees lenders collect at closing in order to reduce the long-term interest rate. If you can pay more at closing, this could bring your interest rate down even further.

Am I paying mortgage insurance?

There are two instances when borrowers must pay mortgage insurance: If they get a Federal Housing Administration (FHA) loan, or if they get a conventional loan with a down payments of less than 20%.

When refinancing, it’s critical to review what type of loan you can get and how much equity you have. “Refinancing when you’re going to have 20% equity or more is going to give you the best deal because you’re not going to have mortgage insurance,” Lewis said.

Getting rid of mortgage insurance will boost your overall savings and can make a refinance worth it even if you’re outside the 50-basis-point threshold.

If you haven’t built much equity in your home through your monthly mortgage payments, but have a chunk of cash in savings, a cash-in refinance can help push you above the 20% mark, Kapfidze said, adding that this could be a decent use of your tax dollars.

Is my financial house in order?

recent study from LendingTree found that one in four mortgage refinance applications is denied. The most common reason applications are denied is that the borrower’s debt-to-income ratio is too high, followed by having poor credit.

Taking steps to improve both your debt-to-income ratio and your credit score ahead of applying for a new home loan will increase the odds of getting improved. “If there’s anything you can do to reduce your non-mortgage debts, that’s going to help,” Kapfdize said. It’s also important to verify that there are no errors on your credit report.

Another reason to review your credit history: Your score has likely improved as you’ve been paying off your mortgage. “Your better credit score will put you into a better rate,” Kapfidze said.

Will my existing lender cut me a deal?

When pursuing a refinance, don’t forget about your existing lender. “If they know you’re shopping around, they should be motivated to give you the best deal,” said Rick Sharga, a mortgage industry veteran and consultant.

Because your existing lender already has your personal information and payment history, refinancing with them can often be an easier process. Additionally, they have a vested interest in keeping your business, which will push them to compete as much as possible with other lenders’ offers.

Another way refinancing with your existing lender can mean better savings is by amortizing the new loan. Your lender will have a sense of how long you’ve had your existing loan for, and as a borrower you will save more by refinancing to a shorter duration than getting a new 30- or 15-year loan and starting from square one.

The post Mortgage Rates Are at 3-Year Lows—Here Are 5 Questions to Ask Yourself Before You Refinance appeared first on Real Estate News & Insights | realtor.com®.

The No. 1 Thing People With Fat Savings Accounts Scrimp on That You Likely Don’t

February 4, 2020

Man counting money

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Housing may be the key to bigger savings.

Earlier this week, a Reddit post — from a 48-year-old woman claiming to be a millionaire despite having only low-paying jobs until about age 30 — went viral, and in it she details some extreme frugality. She says she saves tea bags so she can make multiple cups from one bag, only eats out a couple of times a year, dilutes her dish soap with half water so it lasts longer and almost exclusively wears dark clothes as light colors stain too easily.

But she says there are two things on her long list of frugal habits that research shows really are the key to getting rich: Buying a very affordable home (hers, she says, was just $135,000 and in an excellent neighborhood) and driving an old car (hers is a 12-year-old Subaru, she says).

Indeed, research from TD Ameritrade — which looks at people who save 20% or more of their incomes, called “super savers” — shows that the single biggest difference between what super savers spent less on, as compared with the rest of us, was housing. Super savers spent just 14% of their incomes on housing, while regular folks dropped 23%.

What’s more, research released Monday by The Principal found that more than four in 10 people who fully funded or were very close to fully funding their 401(k) accounts said that one of the sacrifices they made to save so much was that they lived in a modest home. This — along with owning older cars — was one of the two top answers.

One reason super savers may scrimp on housing? “They may see expensive mortgage payments as a liability. Our data shows that they value freedom to do what they want as well as financial security and peace of mind,” explains Dara Luber, senior manager of retirement at TD Ameritrade.

In some ways, it may be easier to cut housing or automotive costs than make smaller conscious choices all day to cut out the things you love, like those lattes. After all, you move once and buy a car infrequently, and your monthly mortgage, rent or auto payments are slashed every month following.

Meanwhile, making choices frequently can lead to something called decision fatigue, which research shows can impact our ability to make the “right” choices as the day goes on.

And because housing is the biggest part of most Americans’ budgets, it’s extra important to save on it. Indeed, the average American household spends a total of roughly $60,000 a year; nearly $20,000 of that spending is on housing, government data show.

Of course, it’s often easier said than done. Households often pay more for housing so they also get into a good school district or because an area is safer. And, it’s also possible that many of the savers interviewed in the TD Ameritrade study had lower housing costs because they put more down on their home when they bought.

Still, it’s important to note that there’s plenty of room to downsize: New homes built in America today on average have 1,000 more square feet than they did in the 1970s, and living space per person has doubled.

The post The No. 1 Thing People With Fat Savings Accounts Scrimp on That You Likely Don’t appeared first on Real Estate News & Insights | realtor.com®.

7 Tax Benefits of Owning a Home: A Complete Guide for Filing in 2020

February 4, 2020

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What are the tax benefits of owning a home? Plenty of homeowners are asking themselves this right around now as they prepare to file their taxes. You may recall the new Tax Cuts and Jobs Act—the most substantial overhaul to the U.S. tax code in more than 30 years—went into effect on Jan. 1, 2018. And as a result, last year likely brought big changes to your taxes, especially the tax perks of homeownership.

While not much has changed taxwise since then, an entire year has passed—so you might need a refresher as you sit down with your receipts.

Well, look no further than this complete guide to all the tax benefits of owning a home, where we break down all the tax breaks homeowners should be aware of when they file their 2019 taxes in 2020. Read on to make sure you aren’t missing anything that could save you money!

Tax break 1: Mortgage interest

Homeowners with a mortgage that went into effect before Dec. 15, 2017, can deduct interest on loans up to $1 million.

“However, for acquisition debt incurred after Dec. 15, 2017, homeowners can only deduct the interest on the first $750,000,” says Lee Reams Sr., chief content officer of TaxBuzz.

Why it’s important: The ability to deduct the interest on a mortgage continues to be a big benefit of owning a home. And the more recent your mortgage, the greater your tax savings.

“The way mortgage payments are amortized, the first payments are almost all interest,” says Wendy Connick, owner of Connick Financial Solutions. (See how your loan amortizes and how much you’re paying in interest with this online mortgage calculator.)

Note that the mortgage interest deduction is an itemized deduction. This means that for it to work in your favor, all of your itemized deductions (there are more below) need to be greater than the new standard deduction, which the Tax Cuts and Jobs Act nearly doubled to $24,400 for a married couple. For individuals the deduction is $12,200, and it’s $18,350 for heads of household.

As a result, only about 5% of taxpayers will itemize deductions this filing season, says Connick.

For some homeowners, itemizing simply may not be worth it. So when would itemizing work in your favor? As one example, if you’re a married couple who paid $20,000 in mortgage interest and $6,000 in state and local taxes, you would exceed the standard deduction and be able to reduce your taxable income by an additional $2,000 by itemizing.

Tax break 2: Property taxes

This deduction is capped at $10,000 for those married filing jointly no matter how high the taxes are. (Here’s more info on how to calculate property taxes.)

Why it’s important: Taxpayers can take one $10,000 deduction, says Brian Ashcraft, director of compliance at Liberty Tax Service.

Just note that this year, property taxes are on that itemized list of all of your deductions that must add up to more than the standard deduction ($24,000 for a married couple) to be worth your while.

And remember that if you have a mortgage, your property taxes are built into your monthly payment.

Tax break 3: Private mortgage insurance

If you put less than 20% down on your home, odds are you’re paying private mortgage insurance, or PMI, which costs from 0.3% to 1.15% of your home loan. But here’s some good news for PMI users: You can deduct the interest on this insurance thanks to the Mortgage Insurance Tax Deduction Act of 2019. Also known as the Secure Act, it retroactively reinstated for 2018 and 2019 certain deductions and credits for homeowners.

“These include the deduction for PMI,” says Laura Fogel, certified public accountant at Gonzalez and Associates in Massachusetts. (This credit is retroactive for 2018, so talk to your accountant to see if it makes sense to amend your 2018 tax return.)

Why it’s important: The PMI interest deduction is also an itemized deduction. But if you can take it, it might help push you over the $24,000 standard deduction. And here’s how much you’ll save: If you make $100,000 and put down 5% on a $200,000 house, you’ll pay about $1,500 in annual PMI premiums and thus cut your taxable income by $1,500. Nice!

Tax break 4: Energy efficiency upgrades

The Residential Energy Efficient Property Credit was a tax incentive for installing alternative energy upgrades in a home. Most of these tax credits expired after December 2016; however, two credits are still around. The credits for solar electric and solar water heating equipment are available through Dec. 31, 2021, says Josh Zimmelman, owner of Westwood Tax & Consulting, a New York–based accounting firm.

The Secure Act also retroactively reinstated a $500 deduction for certain qualified energy-efficient upgrades “such as exterior windows, doors, and insulation,” says Fogel.

Why it’s important: You can still save a tidy sum on your solar energy. And—bonus!—this is a credit, so no worrying about itemizing here. However, the percentage of the credit varies based on the date of installation. For equipment installed between Jan. 1, 2017, and Dec. 31, 2019, 30% of the expenditures is eligible for the credit. That goes down to 26% for installation between Jan. 1 and Dec. 31, 2020, and then to 22% for installation between Jan. 1 and Dec. 31, 2021.

Tax break 5: A home office

Good news for all self-employed people whose home office is the main place they work: You can deduct $5 per square foot, up to 300 square feet, of office space, which amounts to a maximum deduction of $1,500.

Understand, however, that there are strict rules on what constitutes a dedicated, fully deductible home office space. Here’s more on the much-misunderstood home office tax deduction.

The fine print: If you work from home occasionally but have an office to go to, you can’t take this deduction.

Tax break 6: Home improvements to age in place

To get this break, these home improvements will need to exceed 7.5% of your adjusted gross income. So if you make $60,000, this deduction kicks in only on money spent over $4,500.

The cost of these improvements can result in a nice tax break for many older homeowners who plan to age in place and add renovations such as wheelchair ramps or grab bars in slippery bathrooms. Deductible improvements might also include widening doorways, lowering cabinets or electrical fixtures, and adding stair lifts.

The fine print: You’ll need a letter from your doctor to prove these changes were medically necessary.

Tax break 7: Interest on a home equity line of credit

If you have a home equity line of credit, or HELOC, the interest you pay on that loan is deductible only if that loan is used specifically to “buy, build, or improve a property,” according to the IRS. So you’ll save cash if your home’s crying out for a kitchen overhaul or half-bath. But you can’t use your home as a piggy bank to pay for college or throw a wedding.

The fine print: You can deduct only up to the $750,000 cap, and this is for the amount you pay in interest on your HELOC and mortgage combined. (And if you took out a HELOC before the new 2018 tax plan for anything besides improvements to your home, you cannot legally deduct the interest.)

The post 7 Tax Benefits of Owning a Home: A Complete Guide for Filing in 2020 appeared first on Real Estate News & Insights | realtor.com®.

I’m 27 and Put 17% of My Income Into My 401(k), but That’s Keeping Me From Buying a Home

December 27, 2019

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Hello Catey,

I am a single, 27-year-old male. I am beginning to save for a down payment on a home. I currently contribute about 17% to my 401(k). While that is great, it doesn’t leave me very much room to save for a new home. I am looking for perspective about lowering my 401(k) contributions to help save up for a down payment on a home, versus maintaining 401(k) and lengthening my home-buying timeline.

Thanks,
Zack

Dear Zack,

First of all, congrats on contributing so much to your 401(k) – you’re in an elite minority. A survey from personal finance site GoBankingRates found that about one in three Americans have nothing saved for retirement, with millennials being the most likely group to have a $0 retirement balance.

And even those who do contribute aren’t typically contributing like you do: The average person in their 20s with a 401(k) plan is putting in an average of 7% of their income with their employer matching an average of 4%, Fidelity data shows.

So you’re far ahead of the pack on saving for retirement — and that’s great. Even so, before you touch those retirement contribution amounts, consider other options: “This individual is taking a binary approach to his financial situation, assuming that the 401(k) is the only place to look for cash flow to purchase a home,” says Rich Ramassini, the director of strategy and sales performance for PNC Investments. He notes that you should look at your annual cash flow (income – expenses) and look for other opportunities to save — if you haven’t already.

If you’ve done that, some experts MarketWatch consulted with said that it’s OK for you to lower your 401(k) contributions — to a point, and for a short time — if you want to buy a home. (That advice assumes you don’t have any other high-interest debt and you have an emergency fund socked away -— things you might want to deal with before buying a home, as MarketWatch wrote in this article).

“I generally recommend that employees set aside at least 10% to 15% of their income in order to fund the retirement that they want,” says certified financial planner Amy Ouellette, the director of retirement services at Betterment for Business. “However, your contribution rate doesn’t need to be set in stone, and it’s okay to consider lowering it a bit when saving up for other big milestones. While saving for retirement is incredibly important, so is having the financial freedom to make other worthwhile investments like home ownership.”

So how low can you lower your 401(k) contributions while trying to save for a home? “If buying a home is a few years out, I’d consider reducing your 401(k) savings rate to 8% to 10% of your income, while building up the down payment fund; this way you continue to build for your retirement while meeting a shorter term goal,” says Ouellette.

Certified financial planner Bobbi Rebell cautions that if you decide to lower your contributions to save for a home, you should still make sure you contribute at least enough to get the company match: “That is free money and often a return of 100% depending on the specifics of the plan,” Rebell, who is also the host of the Financial Grownup and co-host of the Money with Friends podcasts, adds. And Ouellette adds that you may want to talk to a financial advisor to calculate exactly how much to decrease contributions by and how much that will leave you for a down payment.

Another possible option: A 401(k) loan, though that also comes with risks. “The best option available, if you plan to stay at your job for a while, is to take a loan from your 401(k) to help cover you for the down payment on the home. Doing this will allow you to continue funding your 401(k) on a pre-tax basis (at the same rate as before), locking in that federal tax deduction up front, while getting you the funds needed to buy the home,” says Dave Cherill, a member of the American Institute of CPAs’ Personal Financial Planning Executive Committee — who adds that you must “keep in mind, if you leave your job with the loan outstanding, you will either need to pay it back, or include it in income that tax year and pay a 10% penalty on top (if under the age of 59-1/2).”

And of course, it’s important that you’re selective about the house you buy, ensuring that you can truly afford the home, that you’re getting a good mortgage rate if you do take out a loan, among other factors. And you should be aware of the fact that investing more in stocks may have upsides over real estate, as MarketWatch explored here.

“Owning a home is a huge financial investment but it is also a lifestyle choice. It provides stability, and a sense of ownership. It is often a commitment to a community,” Rebell points out. “Ownership has many non-financial benefits so it’s not [just] about comparing which will give you the better ‘return.’”

The post I’m 27 and Put 17% of My Income Into My 401(k), but That’s Keeping Me From Buying a Home appeared first on Real Estate News & Insights | realtor.com®.

How Do Mortgage Brokers Get Paid?

December 19, 2019

mortgage brokers

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So, you’re looking to buy a home. This is an exciting time filled with home tours, wish lists, and looking forward to making new memories in a new house. But finding a lender and getting a mortgage can be a difficult and confusing task.

Many people don’t have the time to contact numerous lenders and comb through details when looking for a mortgage, and choose instead to go to a mortgage broker for help. Before you do, you should know what mortgage brokers can really do for you and how these loan brokers get paid.

What mortgage brokers do

If you go to a bank for a mortgage or home loan, it will offer only loans carried by that bank. Since it’s just one institution, its home loan options may be limited and may not suit your needs.

If you go to a mortgage broker, he or she should have a variety of loan options from various lenders. It’s the mortgage broker’s job to find the best mortgage rate, tailored for you.

So, if you need to get a house but can’t afford more than a 5% down payment on a 30-year mortgage, your loan broker should approach lenders with those terms.

Hopefully, with the help of that mortgage broker, you’ll find a lender that will offer you the mortgage you need more quickly than you would shopping for mortgage rates on your own.

How loan brokers get paid

Unlike loan officers, mortgage brokers don’t work for banks. They operate independently and must be licensed. They charge a fee for their service, which is paid by either you, the borrower, or the lender.

The fee is a small percentage of the loan amount, generally between 1% and 2%. If you pay this fee, the dollar amount can be either added to the loan or paid upfront.

This 1% to 2% of a loan may sound like a lot of money for you, or for the lender, to pay on top of the mortgage you’re already committing to. Fees may vary, depending on the size or number of loans, but luckily, you shouldn’t be stuck with any hidden fees.

Loan brokers are required to disclose all fees upfront and can charge only that disclosed fee amount. Further, each fee should be itemized, and the broker should be ready to tell you, the borrower, exactly what each fee was for.

When applying for a mortgage, it’s important to know exactly how much you’ll be paying in fees. Knowing what your mortgage broker fees will be upfront will be helpful.

Pre-Dodd-Frank Act

New regulations put in place by the Dodd-Frank Act have restructured how mortgage brokers get paid.

Before this legislation came into effect, lenders could compensate mortgage brokers for getting their clients to agree to high-interest rate loans and signing off on costly fees.

If an unassuming client worked with an unscrupulous loan broker, there were few laws in place to protect the client. As a result of the Dodd-Frank Act, that has changed.

Here are some ways mortgage brokers cannot get paid:

  • They cannot charge you, the borrower, hidden fees.
  • Their pay cannot be tied to your loan’s interest rate.
  • They cannot get paid for steering you in the direction of an affiliated business, such as a title company.
  • In general, they cannot be paid by both you and the lender.

Unless you paid upfront costs, mortgage brokers generally do not receive payment unless the deal is closed.

When you’re thinking of buying a home, and starting the arduous process of shopping for a mortgage and talking to lenders, teaming up with a broker may seem like a good idea.

Although it might be a bit scary to trust someone with the future of your mortgage, it can be a good idea to get some help.

With lots of knowledge of mortgages, plus experience working with loan officers and mortgage lenders, a broker may be invaluable in your first stages of buying a home.

Brokers will take a fee off the top, but that fee could be well worth it!

The post How Do Mortgage Brokers Get Paid? appeared first on Real Estate News & Insights | realtor.com®.

Why Paying Down Your Mortgage Faster Could Be a Good Investment Strategy

December 13, 2019

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Paying down your home mortgage balance faster than required is not a new idea. But you may be surprised to discover how powerful it can be. I will explain. But first, note the following.

This is not for everybody

The accelerated mortgage paydown idea can only work for folks who have positive cash flow and/or available cash. It’s not for people who are struggling to pay their monthly bills.

The idea is only appropriate for folks who are looking for a very conservative, risk-free way to invest some surplus cash flow or funds. Obviously, if you believe you can earn 8% to 10% annually with other investment strategies, you are not going to be very excited about the idea of expending cash to earn 4% (or whatever your exact home mortgage interest rate may be) by paying off your mortgage early.

Finally, the idea is far more powerful when you intend to continue pumping the monthly accelerated mortgage paydown amount into a retirement account after your mortgage has been paid off.

With these thoughts in mind, here’s how the accelerated mortgage paydown strategy can work in the form of some sample scenarios.

Sample scenario

Pilar is in good financial shape. She has cash on hand and positive monthly cash flow. She expects to be in the same position for the foreseeable future. She has a $400,000 balance on a recently refinanced 30-year first mortgage that charges 4% interest.

Pilar’s monthly payment for principal and interest is only $1,910, but she has a whopping 30 years to go before the mortgage will be paid off, if she sticks to the prescribed monthly payment schedule. That means she will be a wizened 75 years old when the mortgage is finally extinguished.

Being 75 years old before your mortgage is paid off probably does not sound so great to most folks. Collecting a guaranteed, risk-free 4% (or whatever rate applies) return by paying down your mortgage quicker (thus avoiding the interest that would otherwise be charged on the principal you pay off early) probably sounds like a solid investment idea to many homeowners. After all, the stock market is looking rather frothy, and fixed income investments are still paying pitiful interest rates.

Say Pilar adopts the accelerated mortgage paydown strategy and immediately starts paying $3,500 per month instead of the scheduled monthly payment of $1,910. She will pay off her $400,000 mortgage balance in about 12 years, at age 57, instead of paying it off in 30 years, at age 75. She will earn a guaranteed 4% rate of return because that’s the interest rate she avoids on the accelerated principal payments. Not bad.

Loss of mortgage interest deductions

One objection against the accelerated mortgage paydown idea is that you will lose tax deductions because interest charges will go down more rapidly than if you stick to the scheduled monthly payments. This may be true, but so what? Consider the following points:

* The TCJA imposes stricter limitations on home mortgage interest deductions for 2018 – 2025. See here for more information.

* The TCJA’s greatly increased standard deduction amounts for 2018 – 2025 mean that many more folks won’t be claiming itemized deductions. Even if you itemize, the larger standard deduction reduces the incremental tax benefit from itemizing. See here.

Impact of future inflation or deflation

While the accelerated mortgage paydown strategy will yield guaranteed results, it is not foolproof. If we have a period of roaring inflation, paying down a mortgage with a relatively low interest rate earlier than required may no longer make sense. In this situation, it may be better to stop the accelerated paydown program, allow the mortgage term to stretch out, and pay the remaining balance back with cheaper inflated dollars.

On the other hand, the accelerated paydown strategy will work great during a period of deflation, because the mortgage is being paid down sooner when dollars are cheaper rather than later when dollars are more expensive.

Big advantage to continuing program after your mortgage is paid off

The accelerated mortgage paydown strategy can clearly be beneficial in and of itself because interest charges are avoided, and debt is eliminated from your personal balance sheet. Another advantage is you can stop and restart the program anytime you want (for example, when inflation or deflation strikes). However, the biggest payoff from following the strategy will probably be reaped by folks who have the cash flow and self-discipline to continue the program even after the mortgage is extinguished. This involves taking the monthly amount that was previously dedicated to the accelerated mortgage paydown strategy and stuffing it into a retirement savings account (whether taxable or tax-advantaged).

In our sample scenario, let’s say Pilar continues the program after her mortgage is paid off by putting $3,500 a month into a retirement savings account that earns 4% annually for another eight years. At age 65, she will have accumulated about $395,000 in the account. This seems like a much better plan than sticking with the status quo and making mortgage payments until age 75.

More sample scenarios

Here are some additional illustrations of how the accelerated mortgage paydown strategy can work.

Faster paydown

Now say 45-year-old Pilar pays $4,500 per month under the accelerated mortgage paydown program instead of making the scheduled monthly payment of $1,910. She will pay off her $400,000 mortgage balance in eight years and 10 months, at age 54, instead of paying it off in 30 years, at age 75. She will earn a guaranteed 4% rate of return because that’s the interest rate she avoids on the accelerated principal payments. If Pilar continues the program after the mortgage is paid off by putting $4,500 a month into a retirement savings account that earns 4% for another 11 years, she will accumulate about $745,000 by age 65. Sweet. Once again, this seems like a much better plan than sticking with the status quo and making mortgage payments until age 75.

Slower paydown

Let’s now be a bit less ambitious and assume that 45-year-old Pilar pays $2,500 per month under the accelerated mortgage paydown program instead of making the scheduled monthly payment of $1,910. This only requires an additional payment of $590 per month. Paying $2,500 per month will allow Pilar to pay off her $400,000 mortgage balance in about 19 years and two months, at age 64, instead of paying it off in 30 years, at age 75. She will earn a guaranteed 4% rate of return because that’s the interest rate she avoids on the accelerated principal payments.

Older individual

Finally, let’s now assume that Pilar is 55 instead of 45. She pays $4,000 per month under the accelerated mortgage paydown program instead of making the scheduled monthly payment of $1,910. She will pay off her $400,000 mortgage balance in about ten years and two months, at age 66, instead of paying it off in 30 years, at age 85. She will earn a guaranteed 4% rate of return because that’s the interest rate she avoids on the accelerated principal payments. This seems like a much better plan than sticking with the status quo and making mortgage payments until age 85.

The bottom line

You get the idea. With financial software, you or your financial adviser can put together your own accelerated mortgage paydown scenarios. Think about it.

The post Why Paying Down Your Mortgage Faster Could Be a Good Investment Strategy appeared first on Real Estate News & Insights | realtor.com®.

7 Home Loans for Teachers (and How to Apply for Them)

November 26, 2019

Home Loans for Teachers

photo: Monashee Frantz/Getty Images
house outline: Greg Chow

People, we have a crisis on our hands: a teacher crisis. One reason for the squeeze: real estate. Rising housing costs and interest rates can prevent teachers from getting a mortgage and living in the districts they serve, creating a lack of teachers everywhere, from Seattle to San Francisco, to Virginia’s Fairfax County.

But did you know that several organizations and lenders offer home loans and mortgage help for eligible teachers? Below are seven programs and lenders that can help teachers get funding for a home.

1. Good Neighbor Next Door

Developed by the U.S. Department of Housing and Urban Development, this program was created for eligible teachers and other civil servants, including firefighters, law enforcement officers, and emergency medical technicians.

It offers a 50% discount on HUD-owned homes located in “revitalization areas”—regions with high foreclosure rates and low homeownership—nationwide.

Here’s the catch: Applicants are not permitted to own a home already. They must also commit to using their new house as a primary residence for three years—if they don’t, they will be required to pay the full cost. See homes available through the loan program at HUDHomes.

2. HUD Teacher Next Door

HUD’s Teacher Next Door connects educators to a wide variety of home loans and down payment help for teachers—including Good Neighbor Next Door—helping applicants find local programs and organizations that reduce mortgage rates and closing costs and provide down payment rebates.

Housing in this HUD program isn’t restricted to federally designated revitalization areas, and there are no residency requirements.

3. Educator Mortgage Program

Mortgage bank and lender Supreme Lending’s Educator Mortgage Program offers up to $800 in loan discounts on closing costs and real estate agent fees on home loans for teachers, as well as a speedy loan turnaround and a $400 donation to the school program of their choice.

Available for all teachers and school district employees, the program requires a minimum credit score of 620, but it doesn’t discriminate based upon previous bankruptcy or foreclosure.

4. Homes for Heroes

Intended for firefighters and military veterans as well as teachers, this program discounts 25% of your real estate agent’s fee when buying and selling, as long as you use an agent or broker who has signed up as a program affiliate.

Applicants also receive reduced closing and home inspection fees.

5. Community lending programs for educators

Through a partnership with the United Federation of Teachers, educators may receive a loan through the Union Assist Program at ICC Mortgage. The loan program offers zero or reduced interest, lower fees for processing or underwriting, as well as financing discounts.

6. Home loans for teachers at the local level

For Californians working in an underperforming school, the Extra Credit Home Purchase Program can provide mortgage tax credits to reduce the total they owe to the federal government. Participants must be first-time buyers and meet income and home price limits, which vary by county.

In Baltimore, the Housing Authority offers $5,000 toward a qualifying down payment on home loans for teachers, and the Texas State Affordable Housing Corp. offers fixed-rate Teacher Home Loans and down payment assistance grants.

Many states offer similar home loans, help with down payments, and mortgage assistance for teacher programs. In many cases, Teacher Next Door can connect qualified buyers with the appropriate grants, or you can search for home loans for teacher programs in your state.

7. Teacher-specific housing

In some areas, housing designed or earmarked for teachers is available. North Carolina teachers in Dare County can sign up for DARE, affordable housing complexes rented at below-market rates.

For New York City residents, Teacher Space New York connects teachers with affordable housing, based on income. And in Baltimore, Union Mill, an “urban oasis for teachers and nonprofits,” offers up to a $600 rent discount for teachers.

Your local school district or teachers union should have more information about available educator-only housing.

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What Is a Strategic Default on a House? When Walking Away Is the Right Move

November 8, 2019

What is a strategic default on a house?

KLH49/iStock

We’ve been told to never walk away from our problems, but what if walking away is the most logical solution? When it comes to an underwater mortgage—where the money you owe on the house is higher than the current market value—some homeowners choose to cut their losses.

Referred to as strategic default or strategic foreclosure, the decision to abandon your home loan is a workaround that some homeowners use to get out of a bad investment. Although controversial, there are times when voluntarily bolting on your mortgage based on declining values might make economic sense.

“During the foreclosure crisis, when property values plummeted, strategic default was the term used to describe borrowers who remained able to pay their mortgage, but made a calculated, strategic choice to stop paying,” says Charles Castellon, attorney at Widerman Malek, in Celebration, FL. “The strategic decision to default is fundamentally a business decision to cut losses.”

During the most recent financial crisis, negative equity in the U.S. peaked at 26% in the fourth quarter of 2009, according to CoreLogic. Today, 4.2% of mortgages are still underwater.

But how does a strategic default work, and how will it affect a homeowner’s creditworthiness?

How strategic default works

The process of a strategic default is fairly straightforward. After making the calculations and realizing your home value pales in comparison to the principle left on your mortgage, homeowners simply stop paying. And if lenders are not getting their money, sooner or later they’ll foreclose on the home.

“To strategically default, you stop paying the mortgage until the lender forecloses and repossesses the property,” says Tendayi Kapfidze, chief economist at LendingTree in New York.

Relevancy to today’s homeowners

Castellon says the concept of strategic default remains relevant since people will always suffer economic hardship, regardless of the strength of the overall economy.

Strategic default was a hot topic during the low point of the foreclosure crisis and may make a comeback after the next market correction,” says Castellon. “During hard times, they may not be able to pay all of their obligations and are forced to engage in triage. This involves determining the likely consequences that will come from defaulting on certain debts and deciding who to pay and who to stop paying.”

How defaulting affects your financial future

Of course, defaulting on a mortgage means you’ll take some sort of hit to your credit score. That’s why anyone considering strategic default should understand the consequences it can have on their financial future. When buying another home or even renting, lenders and landlords may be more discriminating based on your record.

“Any default will affect your credit score, and a foreclosure will remain on your report for up to seven years,” says Kapfidze.

However, he says, many borrowers who default, strategically or otherwise, can purchase a home again in as little as two years.

“Given that strategic defaulters did not do so because of cash flow challenges, they are likely to service other debts well and thus see recovery in their credit score faster than borrowers with additional financial challenges,” says Kapfidze.

Pros and cons of strategic default

Before you choose to walk away and let your property go into foreclosure, it’s important to understand the pros and cons of this decision.

“The benefits of the strategic default include getting out of bad debt and containing the financial damage. It’s all about mitigating losses and damage control,” says Castellon.

It’s important to note that strategic default is not without risk though—having one in your financial history can harm your credit scores and make it harder to get another loan down the road.

And, in some cases, lenders pursue borrowers for deficiency judgments. A deficiency judgment is the difference between the amount a borrower owes on the loan and the foreclosure sale price.

“In my experience, a very small percentage of my distressed mortgage clients have had to face a deficiency claim, but it has been known to happen,” says Castellon.

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5 Crucial Questions to Ask Before You Co-Sign a Mortgage

November 5, 2019

skynesher/iStock

If you’re considering co-signing a mortgage—say, to help your grown kids buy their first house—it’s wise to take a step back and consider whether this move makes sense. Sure, you’re helping a loved one purchase property, but this type of arrangement could also pose a risk to your own finances (not to mention your relationship with the co-signee).

So before you put your John Hancock on the line which is dotted, ask yourself these four key questions first.

1. What is co-signing, exactly?

When a home buyer uses a co-signer, the buyer becomes what’s known as the “occupying borrower”—the person who is going to be living in the home.

Meanwhile, the co-signer—usually a relative or friend of the occupying borrower—is someone who typically doesn’t live at the property.

Co-signers physically sign the mortgage or deed of trust in order to add the security of their income and credit history against the loan. In turn, both parties take on the financial risk of the mortgage together—meaning that if the occupying borrower defaults on the loan, the co-signer is expected to cough up the cash.

To qualify as a co-signer, you must have a strong credit history and good income, says Ray Rodriguez, regional sales manager at TD Bank. Co-signers get vetted just as ordinary borrowers do—they have their income, credit history, credit score, assets, and debts scrutinized by a lender.

2. What are my responsibilities when co-signing a loan?

If anything affects the occupying borrower’s financial health—for example, loss of a job or severe medical problems—”the co-signer is responsible for the [mortgage] payments,” says Rodriguez.

Moreover, if the occupying borrower misses a mortgage payment, that blemish can go on your credit report, as the co-signer, as well—potentially damaging your credit score significantly.

According to data from the credit analysis firm FICO, someone with an excellent credit score—780 or above—could see it drop 90 to 110 points if mortgage payments are missed.

Another thing to consider: When you co-sign a mortgage, you’re adding that person’s debt to your own, reducing your own borrowing power. As a result, “Your chance of getting a loan yourself in the future could be in jeopardy,” says Janine Acquafredda, a real estate broker at Brooklyn-based House-n-Key Realty.

3. What are the risks of co-signing?

Real talk: When you co-sign a financial product—whether it be a mortgage, a car loan, or a credit card—you could get burned.

In fact, in a 2016 CreditCards.com survey of 2,003 U.S. adults, 38% of co-signers said they had to pay a part of or the entire loan or credit card bill because the primary borrower failed to do so. Furthermore, 28% reported they suffered a drop in their credit score because the person they co-signed for paid late or not at all.

Most often, people co-sign mortgages for their friends or family—but co-signing inherently puts the relationship in jeopardy. Proof: Of respondents in the CreditCards.com survey, 26% said the co-signing experience damaged the relationship with the person they had co-signed for.

4. How do I mitigate my risks?

The good news? There are several safeguards you can put in place to protect yourself as a co-signer.

First, make sure your name is put on the title of the home. That way, if your borrower can’t pay the mortgage, you have the power to sell the property.

Second, take steps to monitor your co-borrower’s mortgage payments. You can do this by setting up email and text alerts to let you know when mortgage payments are posted, or asking the mortgage lender to notify you if the borrower misses a mortgage payment.

This offers a nice protection, since every home loan agreement offers borrowers a grace period for late payments.

Typically, there’s a 15-day grace period, in which case you would have 14 days after the payment is due to help your co-signee pay the bill without incurring a late fee or taking a hit on your credit report, says Guy Cecala, chief executive and publisher of Inside Mortgage Finance.

You’ll also want to establish clear lines of communication between you and your co-signee—and make sure the person knows how to contact you if he or she has a problem with the mortgage.

5. Do I trust the borrower?

Before offering to become someone’s co-signer, ask yourself whether you truly trust the other person to be financially responsible for making the mortgage payments.

Pro tip: Past behavior is a good predictor of future behavior. If the person has had trouble making credit card payments or has a pattern of not meeting other financial obligations, he or she may not be responsible enough to be taking on a mortgage, especially one that has your name attached to it.

The bottom line

Co-signing a mortgage is serious business. You’re not just putting your name on a piece of paper—you’re putting your own finances, including your debt obligation and your credit score, at risk.

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