My husband and I have been married for 25 years. We do not have children together, but he has children from a previous marriage.
We are retired now, and he bought property in Florida for us to live in. My name is not on the deed of the property, and he has not made a will yet. I keep complaining to him about it.
If he should die without a will, will his adult children and grandchildren be entitled to the property and house? Hopefully, you will be able to answer this question and set my mind at ease.
Your husband appears to have control issues at worst or, at best, problems with being direct and transparent. This is not the way to deal with a family property, especially after 25 years of marriage. If your husband wants his children to inherit his estate when he is gone, he should discuss it with you like a man (or woman), face to face, and you should outline a plan for your future together. But this game of cat and mouse, where he makes unilateral decisions about your future, is not a respectful or helpful way to conduct a 25-year marriage.
Not knowing if you’re going to have a place to live after your husband dies, assuming he predeceases you, creates a constant feeling of unease. The whole point of saving for retirement and being fortunate enough to retire comfortably is that you can see out your final years together with the knowledge that you will both be financially secure. Only one person in this relationship knows what that feels like — and, given that you have raised this issue with him, he is aware that you do not enjoy that same peace of mind.
Florida is an equitable distribution state and, for the most part, divides property 50/50. Here’s the legal interpretation from Schnauss Naugle Law in Jacksonville, Fla.: “If the decedent’s homestead property was titled in the decedent’s name alone, and if the decedent was survived by a spouse and descendants, the surviving spouse will have the use of the homestead property for his or her lifetime only (or a life estate), with the decedent’s descendants to receive the decedents’ homestead property only after the surviving spouse dies.”
You will have the right to live in this property for the remainder of your life. If you divorce, however, anything purchased during your marriage is considered marital property, and even though this home was purchased in your husband’s name only, it would be divided 50/50. In Florida, “equitable distribution” is mostly treated as “equal distribution.” According to this interpretation of family law in Florida by Arwani Law: “Even if he purchases the car with his own money and puts the car title in his wife’s name, it is still considered marital property.”
And as most lawyers will tell you, a lack of communication is one way of buying a ticket to divorce.
My wife and I are both federal employees and will retire in a few years with total (combined) pensions of around $10,000 a month. Our nest egg for retirement (TSP plus savings) will be another $2 million or so. Social Security will kick in on top of that.
We both love skiing and ski towns, but also lakes with forest running and mountain biking trails. It seems hard to find affordable ski towns that aren’t too touristy with good lakes and water sports nearby. We’d prefer not to be too far from a “real” city to get our urban fix, when needed.
We have $200,000 available for a down payment. That would put a house budget at around $1 million. We’ve looked at Park City — it’s pricey these days. Aspen Valley is way out of reach, as is Breckenridge. East Coast skiing is icy and unpredictable. Places like Whitefish (in Montana) or Crested Butte (in Colorado) are nice but remote and hard to get to. Same with Durango. New Mexico lacks the lake options (ie, Santa Fe, Taos). Lake Tahoe is congested and full of casinos and second homes.
I feel like we must be missing something. Any ideas?
An underdiscovered ski town? That’s a tough one.
I hear you on pricey, but that’s down to supply and demand. And right now, demand is hotter than normal as people figure they can work from somewhere else. Sadly for you, Breckenridge is particularlyhot.
But a $1 million housing budget is nothing to sneeze at. Many are priced out of their dream ski town with far less.
I admit I’m nervous about an $800,000 mortgage. You know your expenses and lifestyle better than I do, but please, double-check your budget and don’t forget to take income taxes on tax-deferred savings into account. Yes, you have an impressive nest egg and pensions. Equally, a 30-year mortgage at 3% is $3,373 in monthly payments — and then there are property taxes and possibly HOA fees.
As you know, having a great time in a ski town for one week is not the same as daily living for 52 weeks. As you look around, ask if it’s mostly filled with second-home owners and vacationers, or are there plenty of year-round residents?
Perhaps consider renting for a year in one town. If it doesn’t feel right, try another one or reassess what you’re looking for. (Cities like Ogden, Utah, and Bozeman, Mont., with ski slopes a short drive away?) And if you love a pricey town, consider a smaller place or something a bit further from the slopes. That could make Summit County — Silverthorne or Dillon instead of Breckenridge? — work for you.
Here are three suggestions to get you started. You should be able to find something well below $1 million.
Winter Park, Colorado
Pick this lower-profile resort as your ski area, and you avoid much of the traffic jams around Georgetown and further up the mountain to Summit County and beyond. While you can live at the resort, you may want to consider Fraser, 15 minutes north of Winter Park, or Granby, another 20 minutes away.
Nearly 16,000 people live in Grand County, or about half as many as in Summit County, and homes are more affordable. The towns are admittedly small — Fraser has about 1,300 year-round residents, and Granby has around 2,100 people. (By comparison, Breckenridge has about 5,000.)
Not only would you be in the mountains, but you’d have plenty of water options. Granby in particular is close to Lake Granby as well as Shadow Mountain Lake (actually a reservoir) and Grand Lake.
Average summer highs are in the low 80s. Snow starts in October, when there is an average of 2 inches and continues through April.
Here’s something that might surprise you: there are almost no chain stores and restaurants in town because of a long-standing local ordinance that restricts their numbers in favor of mom-and-pop stores. You’ll have to go to a local coffee shop instead of Starbucks (no worries, there’s a local roaster too). Be sure to peruse the bulletin boards in the coffee shops to find activities.
Valley County has 11,000 residents, and more than a quarter of them are 65 and older. The town will soon have a new hospital; St. Luke’s McCall Medical Center, part of a major health system in the state, is being rebuilt as well as expanding. Today’s version is rated highly for patient experience.
Would you prefer somewhere a little bigger? Sandpoint, in northern Idaho, has around 8,900 residents (Bonner County has 46,000, and a quarter of people there are 65 and older). It’s perched on Lake Pend Oreille and surrounded by mountains and forest. Schweitzer Mountain Resort is just 11 miles away with 2,900 skiable acres, and, Powder magazine says, rarely is crowded.
You can mountain-bike at the resort during the summer or try local options like the Gold Hill Trail. Given all the mountains and forests, you won’t be short of playgrounds.
Average summer highs here are a touch higher than in McCall. Snow starts falling in November.
Your city fix is Spokane, less than two hours away.
Don’t kid yourself — the COVID boom in ski towns has reached this corner of Idaho 75 miles from the Canadian border. Stephanie Rief of the Selkirk Association of Realtors says home sales in Sandpoint from April 20 through Sept. 30 have jumped 40% from the same period in 2019. The median home price is up 17%.
“We’re being overrun,” she says. Many buyers are from California, Washington and Oregon, “but you name it — I’d say all 50 states, minus 10. At the most.”
The median home price in the two-county area is now $371,500, she says, and the average home price is higher. On the outskirts of Sandpoint, that price translates into a three-bedroom, two-bathroom house. And nothing stays on the market for long these days.
Economic fallout from the COVID-19 crisis and civil unrest could cause many rental real estate properties to run up tax losses in 2020 and maybe beyond. This column covers the most important federal income tax questions and answers for rental property owners. Here goes.
What can I write off?
Nothing new here. You can deduct mortgage interest and real estate taxes on rental properties. You can also write off all standard operating expenses that go along with owning rental property: utilities, insurance, repairs and maintenance, care and maintenance of outdoor areas, and so forth.
What about depreciation write-offs?
For many rental property owners, the tax-saving bonus is the fact that you can depreciate the cost of residential buildings over 27.5 years, even while they are (you hope) increasing in value. You can generally depreciate the cost of commercial buildings over 39 years.
Example: You own a small apartment building that cost $1.5 million not including the land. The annual depreciation deduction is $54,545 ($1.5 million/27.5). The deduction can shelter that much annual positive cashflow from income taxes. So, depreciation write-offs are nice tax-savers, especially if you own an expensive property or several properties.
Variation: As stated earlier, commercial buildings must be depreciated over a much-longer 39-year period. Even so, the annual depreciation write-off for a $1.5 million commercial building is $38,462. The deduction can shelter that much annual cash flow from income taxes.
Can I claim 100% first-year bonus depreciation?
Yes, for qualified improvement property (QIP) expenditures on a nonresidential building. The Coronavirus Aid, Relief, and Economic Security Act (CARES Act) included a retroactive correction to the statutory language of the Tax Cuts and Jobs Act (TCJA). The correction allows much faster depreciation for commercial real estate qualified improvement property (QIP) that’s placed in service in 2018-2022. QIP is defined as an improvement to an interior portion of a nonresidential building that’s placed in service after the building was placed in service. However, QIP doesn’t include any expenditures attributable to: (1) enlarging the building, (2) any elevator or escalator, or (3) the internal structural framework of the building. Thanks to the CARES Act correction, you can write off the entire cost of QIP in Year 1, because it qualifies for 100% first-year bonus depreciation.
Alternatively, you can choose to depreciate QIP over 15 years using the straight-line method. That alternative might make sense if you expect higher tax rates in future years. Discuss your QIP depreciation options with your tax pro.
What else do I need to know about depreciation write-offs?
You ask such good questions. There’s more. The TCJA increased the maximum Section 179 first-year depreciation deduction for qualifying real property expenditures to $1 million, with annual inflation adjustments. The inflation-adjusted maximum for tax years beginning in 2020 is $1.04 million. The Section 179 deduction privilege potentially allows you to deduct the entire cost of qualifying real property expenditures in Year 1. I say potentially, because Section 179 deductions are subject to several limitations. Ask your tax pro for details.
The TCJA also expanded the definition of qualifying property to include expenditures for nonresidential building roofs, HVAC equipment, fire protection and alarm systems, and security systems.
Finally, the TCJA further expanded the definition of qualifying property to include depreciable tangible personal property used predominantly to furnish lodging. Examples of such property include beds, other furniture, and appliances used in the living quarters of an apartment house.
Can I claim the qualified business income (QBI) deduction base on my net rental income?
Maybe. For 2018-2025, the TCJA established a new personal deduction based on qualified business income (QBI) passed through to your personal Form 1040 from a pass-through business entity (meaning a sole proprietorship, LLC treated as a sole proprietorship for tax purposes, partnership, LLC treated as a partnership for tax purposes, or S corporation). The deduction can be up to 20% of QBI, subject to restrictions that kick in at higher income levels. For a while, it was unclear if you could claim QBI deductions based on net rental income passed through to you from one of the aforementioned pass-through entities. The IRS eventually issued taxpayer-friendly guidance that allows QBI deductions in most such cases, but you must follow complicated rules to collect the tax-saving benefit. As your tax pro for details.
What about the passive loss rules?
Ugh. If your rental property throws off tax losses (most properties do, at least during the early years and during years when the economy is suffering — like now), things can get complicated. The so-called passive activity loss (PAL) rules may come into play. Losses from rental properties will usually be classified as passive losses.
In general, the PAL rules only allow you to currently deduct passive losses to the extent you have current passive income from other sources, like positive income from other rental properties or gains from selling them. Passive losses in excess of passive income are suspended until you either have enough passive income or you sell the property that produced the losses. Bottom line: the PAL rules can postpone any tax-saving benefit from rental property losses, sometimes for years. Fortunately, there are several exceptions to the PAL rules that can allow you to deduct rental property losses sooner rather than later. Your tax pro can explain the exceptions and help you plan to become eligible, if possible.
Is that the end of the bad news?
Not exactly. Say you manage to successfully clear the hurdles imposed by the PAL rules for your rental property losses. So far, so good. But the TCJA established another hurdle that you must also clear to currently deduct those losses. For tax years beginning in 2018-2025, you cannot deduct an excess business loss in the current year. An excess business loss is one that exceeds $250,000 or $500,000 for a married joint-filing couple. Any excess business loss is carried over to the following tax year and can be deducted under the rules for net operating loss (NOL) carry-forwards. This loss disallowance rule applies after applying the PAL rules. So, if the PAL rules disallow your rental losses, this rule is a nonfactor.
COVID-19 Relief: Thankfully, the CARES Act suspends the excess business loss disallowance rule for losses that arise in tax years beginning in 2018-2020. That’s good news.
What’s the deal with net operation losses (NOLs)?
Say you manage to successfully clear both of the preceding hurdles for your rental property losses. Now we are talking, because you can generally use those losses currently to offset taxable income from other sources. If losses for the year exceed income from other sources, you may have a net operating loss (NOL) for the year.
COVID-19 Relief: The CARES Act allows a five-year carryback privilege for an NOL that arises in a tax year beginning in 2018-2020. So, you can carry an NOL from one of those years back to an earlier year, deduct it, and recover some or all of the federal income tax paid for the carryback year. Because federal income tax rates were generally higher in years before the TCJA took effect, NOLs carried back to those years can be especially beneficial. The TCJA kicked in starting with tax years beginning in 2018.
What if I have positive taxable income?
Eventually your rental property should start throwing off positive taxable income instead of losses, because escalating rents will surpass your deductible expenses. Of course, you must pay income taxes on those profits. But if you piled up suspended passive losses in earlier years, you can now use them to offset your passive profits.
Another nice thing: positive taxable income from rental real estate is not hit with the dreaded self-employment (SE) tax, which applies to most other unincorporated profit-making ventures. The SE tax rate can be up to 15.3%. Something to avoid when possible.
One bad thing: positive passive income from rental real estate owned by a higher-income individual can get socked with the 3.8% net investment income tax (NIIT), and gains from selling properties can also get hit with the NIIT. Ask your tax pro for details.
The bottom line
There you have it: most of what you need to know about the federal income tax issues that can come into play for rental property owners. The economic fallout from the COVID-19 crisis and recent civil unrest increase the odds that rental properties will suffer losses in 2020, but tax relief provisions may soften the blow.
Homeowners are asking for breaks on their mortgage payments in droves, as millions of Americans face the prospect of unemployment or reduced income because of the coronanvirus pandemic. But requesting forbearance on your mortgage isn’t foolproof.
Requests for forbearance have poured in. Forbearance requests grew by 1,896% between March 16 and March 30, according to a recent report from the Mortgage Bankers Association, a trade group that represents the mortgage industry. And before that, forbearance requests had increased some 1,270% between March 2 and March 16.
As consumers have rushed to call their servicer in search of assistance, call centers have been overwhelmed, leading to longer wait times to speak with a representative.
“If you are eligible for this and you need the help, take full advantage of the program,” said Rick Sharga, a mortgage industry veteran and founder of CJ Patrick Company, a real-estate consulting firm. “But similarly, if you don’t need the help, and if you can pay your mortgage, don’t try and game the system and make it harder for people who really do need the benefits to access.”
For those who have yet to get a forbearance agreement in place, here’s what you need to know:
‘Forbearance is not forgiveness’
To be clear, mortgage borrowers will still need to pay off their loan eventually if they receive forbearance.
“Forbearance is not forgiveness,” said Karan Kaul, a research associate at the Urban Institute, a left-of-center nonprofit policy group. “You still owe the money that you were paying, it’s just that there’s a temporary pause on making your monthly payments.”
‘Forbearance is not forgiveness. You still owe the money that you were paying, it’s just that there’s a temporary pause on making your monthly payments.’
Karan Kaul, a research associate at the Urban Institute
Under a forbearance agreement, a borrower can pause payments entirely or make reduced payments on their mortgage. Homeowners with federally-backed mortgages are eligible for up to 180 days of forbearance initially under the CARES Act. At that point, if they’re still facing financial difficulty, they can request an extension of up to another 180 days of forbearance.
The provisions in the stimulus package stipulate that during the forbearance period, mortgage servicers cannot make negative reports about the borrower in question to credit bureaus, including the three main ones, Experian, Equifax and TransUnion. Borrowers also will not owe any late fees or penalties if they are granted forbearance.
You need to know who your servicer is
Struggling homeowners won’t automatically receive forbearance. You need to request it from your servicer.
Mortgage servicers are the companies who receive your monthly payments. A homeowner’s mortgage servicer isn’t necessarily the same as their lender — many lenders sell the servicing rights for mortgages to other companies.
The first step to figure out who your servicer is would be to check your mortgage statement. If for some reason the information isn’t there, you can look it up by searching the Mortgage Electronic Registration Systems website. Alternatively, you can check with Fannie Mae and Freddie Mac, if your loan is backed by one of them.
How do you know if you qualify?
To qualify for forbearance, a borrower must have a mortgage backed by one of the following federal agencies:
• Fannie Mae
• Freddie Mac
• The Federal Housing Administration (FHA)
• The U.S. Department of Veterans Affairs (VA)
• The U.S. Department of Agriculture (USDA)
Borrowers should avoid calling their servicers to find out if they’re eligible, Sharga said.
“Find out what you can before you try and reach your mortgage servicer, because they are overwhelmed with call volume right now,” Sharga said.
Fannie Mae and Freddie Mac both have websites where you can check whether your loan is backed by one of them. You can access those websites here and here. Almost half of all mortgages in the U.S. are backed by Fannie and Freddie.
To find out if your loan is backed by the FHA, check the original closing documents or your most recent mortgage statement. If you pay for FHA Insurance, then that agency is backing your loan. Alternatively, your closing documents should include a HUD (Department of Housing and Urban Development) statement and a 13-digit HUD number.
Because the VA and USDA loan programs target specific borrowers, those borrowers should already know if they have loans backed by those agencies. In the event you are still unsure, you can call your servicer.
Those who aren’t eligible aren’t necessarily out of luck, though. Servicers for non-federally-backed mortgages may still be willing to provide forbearance to borrowers facing financial trouble right now.
Be prepared to answer some questions
You don’t need to provide documentation to prove your financial hardship at this time, but your servicer may have some questions to determine how much assistance they will offer you.
• Is the problem you are facing temporary or permanent?
• What is the current state of your income, expenses and other assets, including money in the bank?
• Are you a service member with permanent change of station orders?
“Consumers should indicate they have had a hardship due to COVID-19 and ask about their forbearance options with the company servicing the mortgage loan,” said Chris Diamond, director of financial products at online mortgage lender Better.com. “They should ask how long of a forbearance they can qualify for as well as what their options are at the end of that forbearance period.”
Get your forbearance agreement in writing
The CFPB stresses that any borrower who has received a reprieve on mortgage payments should get their agreement in writing.
“Once you’re able to secure forbearance or another mortgage relief option, ask your servicer to provide written documentation that confirms the details of your agreement and that you’re clear on what the terms are,” the agency said on its website.
Having the agreement in writing will protect you if there are errors in your mortgage statement or your credit report.
Watch out for balloon payments
After a borrower has secured a forbearance agreement from their servicer, they should discuss repayment options.
“You don’t want a surprise like finding out that six months of deferred loan payments are all due immediately upon the end of the forbearance,” Sharga said. “Most people simply won’t have six months’ worth of mortgage payments available.”
Some borrowers have expressed concerns after being offered a balloon payment option like the one Sharga described. With a balloon payment, a borrower would pay back the entire amount owed for the forbearance period at once.
While a lender may offer a balloon payment as an option, there is no mandate that a borrower must repay in this manner, Kaul said.
Homeowners can and should aim to negotiate the best possible repayment options for them. “All those terms are negotiable,” Sharga said. “Be diligent, be steadfast and try and stand your ground.”
Beyond a balloon payment, servicers may offer to extend the term of the mortgage and tack on the missed payments at the end, so a 30-year mortgage would be extended by 4 months if that’s how much forbearance a borrower received.
There is no mandate that a borrower must repay what they owe in missed payments in one balloon payment after forbearance.
Alternatively, a borrower may also be offered the option to amortize the balance they owe over the life of the loan. This means they would repay a portion of the balance owed in addition to their usual monthly payments.
A borrower can request information on who owns their mortgage note, since the owner might be able to provide more relief options. Servicers must respond to these requests within 10 business days, said Andrea Bopp Stark, an attorney with the National Consumer Law Center.
“If the servicer does not respond, the borrower should send another letter and seek legal assistance,” Bopp Stark said. “The servicer could be held liable for actual damages and up to $2,000 statutory damages for a failure to respond.”
If you’re still in financial trouble after forbearance, consider a loan modification
It’s too soon to tell whether 12 months of forbearance will be enough assistance for those who are among the millions of Americans who have lost their jobs in recent weeks.
“The most beneficial option if the borrower might be out of work or impacted for an extended period is to request to modify the loan at the end of forbearance,” Diamond said.
Unlike forbearance, a loan modification involves a permanent change to the details of the mortgage. This can include adjusting the interest rate, extending the duration of the loan or deferring the amount owed until the end of the loan as a separate lien.
A servicer will determine whether or not a borrower qualifies for the modification.
When I was young, my parents bought an old two-story beach house one block from the Atlantic Ocean. The first floor consisted of nothing more than a large, empty garage with a concrete floor that made a great place for us kids to skate and play on rainy days.
We lived there for three years when they decided to sell it and move back into town. It was as easy to sell as it was to buy.
Zoom forward into a world of rising seas and stronger hurricanes, and buying a home in a coastal town or near a river is anything but simple. While there’s a lot to know to avoid making a regrettable mistake, these 5 things are the most important:
1. A home’s flood zone may not include the most recent major flooding events: Many people are under the false assumption that flood maps are updated each time there’s a major storm or flooding event. But due to a lack of proper staffing and funding, FEMA (Federal Emergency Management Agency) flood maps are often woefully outdated or in some parts of the country, nonexistent.
Even if new maps have been recently released in your community, they may not account for recent flooding events because the research used to create the maps is likely dated well-before the release date. It’s also important to remember that today’s assigned flood zones are not locked-in forever, nor is the cost you’ll be paying for flood insurance.
2. Your realtor may not give you flood advice: It’s been my experience that most realtors don’t give advice about this hot-potato issue. If your realtor falls into this category, find a realtor who is a buyer’s (as opposed to a seller’s) agent and does give flood advice. But they are few and far between.
3. It’s difficult to determine if a home has flooded in the past: In many states, but not all,the seller is legally required to disclose in writing to potential buyers any major issues they experienced with the home during the time they owned it — including flooding. Here’s where it gets tricky. If flooding occurred sometime in the past, but not while the present owner lived there, it doesn’t have to be disclosed, even if the present owner knows about it.
As far as determining if nearby homes or entire neighborhoods have ever flooded, I’m unaware of any central repository that makes this information free and available to the public by easily searching a street address. Perhaps such a search engine will exist soon. In the meantime, good old-fashioned legwork will get you the most honest information. I learned about flood-prone neighborhoods in my coastal city from my dental hygienist and from talking to people walking their dogs in neighborhoods where I was considering buying.
4. There may be a big disconnect between a home’s assigned FEMA flood zone and the home’s probability of flooding: Whereas FEMA’s flood maps use historical data to assign flood zones to each home, a newer site, www.floodiq.com, uses predictions based on research from the National Oceanic and Atmospheric Agency (NOAA). This site incorporates the predicted effect of climate change by home address and gives the ability to see various tidal flood and hurricane scenarios today and into the future.
This is also an easy way to see the existing assigned FEMA flood zone for that home. Like me, you may be struck by the disconnect between the backward-looking FEMA flood zone and what NOAA predicts for the future flood risk of a given home.
5. It’s nearly impossible to find out how high above sea level a home really sits: What a shock it was to read about the recent study in the journal Nature Communications, which predicted that by 2050, three times as many people worldwide will be experiencing flooding as had been previously predicted.
Why the big change? The reason is that for this study, scientists at Climate Central, a Princeton University-based climate science organization, utilized much more advanced elevation technology than had been used in the past. This new technology revealed that prior estimates for ground elevation above sea level were overstated by an average of six feet in coastal regions, and up to 13 feet in some densely populated areas.
Given this shift, I can see the old real estate adage of “location, location, location,” being replaced with “elevation, elevation, elevation.” I also predict that accurate, searchable elevation data will eventually become available and that it will be widely used as part of the home buying process. (Click here to see Climate Central’s predictions for the U.S. and enter your city in the search box. You’ll get a much clearer idea of what rising sea levels coupled with more accurate lower ground elevations hold in store for your home.
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?
A 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.
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.
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.
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).”
“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.’”
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.
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’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.
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.
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.
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.
Home prices are on the rise, climbing another 3% year over year, according to S&P CoreLogic Case-Shiller 20-city home price index from February released this month. Still, that growth is slowing and some experts are predicting that we’re increasingly entering a buyer’s market.
And that means sellers who want to get a premium for their home may have to work for it. So MarketWatch dug into the research and asked experts what really moves the needle to get you a better-than-average price for your home. Here’s what we found.
‘By listing during the week of March 31 to April 6, sellers are able to take advantage of a sweet spot in the season that offers high buyer demand, less competition, quick home sales, and strong price.’
Sellers got a premium in other spring and summer months too: May (7.4%); July (7.3%); April (6.4 %); March (6.1%); August (5.8%); meanwhile December, January and October sellers got less than a 4% premium. ATTOM’s Chief Product Officer Todd Teta says that this is because demand is much higher in spring and summer in part because school is out and winter is over so people are out and about.
Pause before you renovate. While you might be tempted to put in a top-of-the-line kitchen or a fresh bathroom, most of the time you don’t recoup the costs of a big-time renovation when you sell, according to a study of 22 major renovations. Indeed, with the two renovations where you recoup the highest percentage of your costs — garage door renovation and manufactured stone veneers — you’re still out of pocket at least $100.
So if your house is in decent condition, you may be financially better off making smaller cosmetic updates that don’t cost much. “If the house has ‘good bones’ — which refers to items like structural integrity, a solid roof, well-functioning windows and sufficient HVAC (heating, ventilation and air conditioning) — then upgrading the FF&E [finishes, fixtures and equipment] may be very worthwhile,” says Justin Riordan, interior designer, architect and founder of the Portland-based home staging company Spade and Archer Design Agency. That might include “fresh interior paint, new carpeting, refinishing wood floors, replacing outdated countertops, painting cabinets, and installing new appliances and light fixtures. Recouping the cost of these items is easy provided the bones are good and the house is beautifully staged and presented to potential homebuyers.”
Set the stage. Nathan Garrett, owner of Garretts Realty in Louisville, Ken., says that you should both “create more floor space and room by removing any unnecessary furniture” and “create more closet space by packing away 50% of your belongings so it looks like there is plenty of storage.”
And if you can find an affordable staging company — or do it smartly yourself for little money — that’s a good bet too, according to a study MarketWatch recently reported on. Kati Baker, a luxury home staging specialist with Downtown Realty Company in Chicago, says you should take a lot of your personal effects out of the home: “Today’s buyers want to walk in the door and immediately envision themselves in the space. So, we start with a blank slate – paint the walls a neutral color, remove personal photos and knick-knacks, haul non-essentials to off-site storage, clear all countertops – and then we add visual items to highlight the space and make it interesting.” That means putting up a few mirrors (which can make a space seem bigger) or neutral and tasteful art pieces (think abstract canvas art), especially large artwork “as too many small pieces in one space can create visual clutter and look messy.”
Another pro tip: “Set a vignette that highlights a favorite feature of the home. For example, we might arrange a tray with two glasses and a bottle of wine on a bar countertop or place plush towels, bath salts and a candle on the ledge of a soaking tub,” says Baker.
‘Sure, you have a fancy camera and you take great photos of your cat, but you’ll garner much more interest in your property and make more money if you leave the listing photos to the pros.’
Call in the pros for photos. Fully 90% of homebuyers searched online for a home to buy, according to data from the National Association of Realtors — and that showcases just how important good photos are towards getting people into your home for a viewing.
“One of the first things a potential home buyer will do is see photos of the house online before they even see the house. First impressions are crucial in garnering interest from the largest number of potential buyers and therefore creating competition that drives up the sale price of the home,” says real estate investor Ryan Substad, owner of Northwest Property Solutions.
That usually means hiring a pro: “Sure you have a fancy camera and you take great photos of your cat, but you’ll garner much more interest in your property and make more money if you leave the listing photos to the pros,” says John Graff, the CEO and a broker at Ashby & Graff Real Estate Los Angeles. “Depending on the real estate in question it may be worth paying extra for virtual tours, drone videos, and other creative ways to generate interest in your home.” Indeed, pros can make small rooms look bigger, dimly lit areas brighter and more.
“Taking your own photos (or having your agent take photos) might save you $100-$200 but in the end it might cost you thousands of dollars on the back end when you end up selling your home for less,” says Substad.