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2021 Conforming Loan Limits

11/30/2020
2021

EllieMae - October 2020 Numbers

11/23/2020
EllieMae

Vacation Sales Up

11/20/2020
Vacation

Your Best Investment

11/19/2020
Your

More Time at Home

11/18/2020

We are all spending more time at home and will probably need to continue to do so for a while longer.  Depending on the makeup of your family, your home is now a home office, a gym, a virtual classroom and considerably more meals have been prepared in your kitchens in the past six months than normal.

Some businesses have undergone a metamorphosis that has shown them that maybe they do not need the big commercial spaces for their employees.  They realize that they can be just as productive with their work force offsite which will cut expenses.

If this scenario sounds familiar, it may be worth exploring what moving would look like for your situation.  To analyze the options, you will need to know what your home is worth and what the net proceeds will be after selling it.

You will need to know what homes are available with the amenities you are looking for together with the prices and mortgage money.  Depending on the interest rate on your current mortgage, there may not be much difference in payment for a larger mortgage at today's incredibly low rates.

Another option that some homeowners are considering is to not reinvest all the proceeds from the sale of their existing home into the new home.  They are reserving some of the cash as a contingency fund for the unexpected. This strategy is providing peace of mind in uncertain times.

It is said that an investor is faced with three decisions every day: buy, sell, or hold.  The equity in a home represents, for most people, their largest investment asset.  While it is an asset, it is also an amenity.

Prudential thinking would insist on protecting your investments, but it would also suggest that you would evaluate alternatives to avoid missing opportunities.  Having the facts available will make the options clearer and possibly, the decisions will become obvious.

We are available to help you assemble the information you need to consider what is best for you.

Moving "Down" in an "Up" Market

11/10/2020

Selling a home and buying a lower priced home that meets your current needs can be to your advantage in an "Up" market like the current one with low inventory.  The advantage is that you can maximize the price for the home you're selling and not have to reinvest it all in your replacement.

Just to illustrate the point, let's say there is a 10% premium in the sales price of a home currently.  If you're selling a home for $750,000, it would be $75,000.  If you replaced the home with a $500,000 home, the premium would be $50,000 which means you're $25,000 ahead.

Let's further assume that your home is debt free so that when you sell it, you have a large cash equity.  Instead of paying cash for the replacement home, get an 80% loan at today's low interest rates and reinvest the proceeds to supplement your retirement.

You may be able to get as low as a 2.5% mortgage and earn significantly more on the proceeds in other investments.

Home prices are up significantly over last year and they're selling on average in three weeks.  Inventory is down and there is less competition for your home than normal which can lead to a higher price.  Closed sales increased 9% from August to September according to a Zillow report.

Moving down in an "up" market may be to your advantage.  It could lower your cost of housing by saving on property taxes, insurance, utilities and maintenance while being able to take cash out of your home to reinvest in your retirement.

 You'll be using "other people's money" to free up your equity that you can reinvest at a rate higher than you'll be paying on your mortgage.  The difference would be profit.

Accumulate Wealth

11/6/2020
Accumulate

Cutting Your Housing Costs in Half

11/4/2020

Cutting the price will generally bring buyers of anything out of the woodwork that were not serious before.  Some renters could easily lower their monthly cost of housing by half or more by purchasing a home with all the financial benefits that come with it.

The most obvious thing in today's market is that the mortgage payment could be less than the rent the tenants are paying.  With mortgage rates hovering around 3%, this is a major factor of the savings.

The two other major contributing factors are appreciation and amortization of the mortgage, neither of which benefit tenants continuing to pay rent.  According to the FHFA House Price Index, home prices rose 5.4% from July 2019 to July 2020.  There were 400,000 less homes on the market during the summer of 2020 than the previous summer which is influencing appreciation.

With each payment a homeowner makes on their mortgage, a portion is used to reduce the principal amount owed.  This is like a savings account for the owner because it lowers their unpaid balance and increases their equity.

The equity becomes an asset that can be accessed by doing a cash-out refinance or a home equity line of credit once the equity has reached 80% loan-to-value.

A $300,000 home purchased with an FHA loan at 3% for 30 years would have a payment of approximately $2,013 including principal and interest, taxes, insurance, and mortgage insurance premium.  If the tenant were paying $2,400 in rent, this would be a savings of almost $400 a month.

The monthly principal reduction would average $500 a month for the first year which would lower the net cost of housing.  The other major item to consider would be the appreciation.  Assuming, in this example, the home was appreciating at 3% annually, the monthly appreciation in the first year would be $750 which would further lower the cost of housing.

Rent

$2,400

Total House Payment

$2,013

Less Monthly Principal Reduction

$513

Less Monthly Appreciation

$750

Plus Estimated Monthly Maintenance

$200

Net Cost of Housing

$950

 

In this example, it would cost over $1,400 per month more to rent than to own.

A different approach to this would be that the equity in this home in seven years would be $121,579 based on appreciation and principal reduction.  If the same person continues to rent, there would be no equity build-up.

If you're curious as to how much you could cut your housing cost, go to the Rent vs. Own or contact your real estate professional.

Gift Limits 2020

10/29/2020
Gift

Some Mortgage Interest May Not be Deductible

10/28/2020

Banks are concerned about making loans that will be repaid not about making loans that are tax deductible for homeowners.  It is good business for the bank but how is the homeowner supposed to know?

Most homeowners and potential homeowners are aware there are tax benefits associated with ownership.  For instance, mortgage interest and property taxes have been deductible expenses from federal income tax since it was enacted in 1913. 

The current law provides that homeowners can deduct the interest on Acquisition Debt which is the amount of debt incurred to buy, build or improve a first or second home up to $750,000.  The amount of acquisition debt decreases as payments are made and it cannot be increased unless the additional funds borrowed are used for capital improvements.

It is not uncommon for a homeowner to refinance their home for any number of reasons.  It could be to get a lower interest rate that would lower the payments or remove mortgage insurance.  However, when additional funds are borrowed for reasons beyond "buy, build or improve", the excess is considered personal debt and the interest is not deductible according to IRS.

Maybe this is not important if the owner is taking the standard deduction because it is higher than the total of the property taxes, qualified mortgage interest and charitable deductions made by the taxpayer.  Currently, it is estimated that 90% of homeowners are electing to use the increased standard deduction implemented with the 2017 Tax Cuts and Jobs Act. 

A confusing issue that occurs at the end of the year is when the lender reports to the borrower the amount of interest that was paid.  While that amount is most probably accurate, the bank doesn't know if it is qualified mortgage interest for the borrower. 

It is the responsibility of the taxpayer to keep track of outstanding acquisition debt and whether part of the balance is considered personal debt.

Another area where it could become important is if the property was lost due to foreclosure, deed in lieu of foreclosure or a short sale.  The provisions of the Mortgage Forgiveness Act have been extended through 12/31/20 which exempts the forgiven debt from being considered income and therefore taxable.  However, it only applies to acquisition debt.  Any part of a mortgage refinance that is considered personal debt could be taxable in that situation.

As an example, let's say that homeowners originally borrowed $300,000 to purchase a home that they owned for 15 years.  During that time, the home appreciated significantly, and they refinanced it twice.  Once, they made some improvements and took out cash to pay off personal loans and the second time, it was only a cash out.

Original acquisition debt

$300,000

Remaining acquisition debt including improvements

225,000

Unpaid balance on current mortgage

$550,000

Personal debt

325,000

 

In the example above, the personal debt of $325,000 would be considered income on foreclosure and recognizable as income on that year's income tax return.

If you have never refinanced your home or have refinanced it but never taken any money out of it except to make capital improvements, your unpaid balance in most likely acquisition debt.  However, it you have refinanced your home and pulled money out of it for purposes other than capital improvements, those funds may be considered personal debt.

This article is for information purposes.  If you are unclear about the current acquisition debt on your home or need advice for your individual situation, contact your tax professional.  Additional information can be found in IRS Publication 936, Home Mortgage Interest Deduction.

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