Tax Changes Mean Mortgage-Interest Deduction Finds Fewer Takers

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By: Richard Rubin/April 24, 2018

 

 

mortgage-deductions-down2

Meet the new mortgage-interest deduction. It’s smaller and much more concentrated among high-income households.

In 2018, the deduction will save taxpayers $25 billion, down from $60 billion in 2017, according to estimates released on Monday by the Joint Committee on Taxation, the official analysts of tax policy for Congress.

That’s largely because of the way last year’s tax law change altered the standard deduction. The much higher standard deduction means that far fewer taxpayers will itemize their deductions. In most cases, only taxpayers with total deductions exceeding $12,000 for individuals and $24,000 for married couples will itemize. And those deductions can now include only $10,000 in state and local taxes, which means the most likely itemizers are Americans with sizable mortgages or charitable contributions.

The result is that just 18 million households are expected to itemize deductions for 2018, down from 46.5 million in 2017, according to JCT.

The resulting home mortgage-interest deduction — once considered a tax break too sacred to touch — will be used by just 13.8 million taxpayers, down 57%. In 2017, about 12.4% of the tax break went to households with incomes exceeding $500,000, and 36.5% of the benefit went to people earning between $100,000 and $200,000.

Now, 23.9% of the shrunken mortgage-interest deduction is projected to go to households making more than $500,000 with 28.9% of the benefit going to households between $100,000 and $200,000. Other changes in policy also curb the mortgage-interest deduction, including the cut in marginal tax rates, which reduces the value of every deduction. Homeowners can now deduct interest on up to $750,000 in loans, down from $1 million.

The committee also released data on the distribution of the 20% deduction for pass-through businesses included in last year’s tax law. Those businesses include S corporations, limited-liability companies and partnerships that don’t pay the corporate income tax and instead pay taxes through their owners’ individual income tax returns.

That break will reduce federal revenue by $40.2 billion in 2018, and 44.3% of the benefit will go to roughly 200,000 business owners making at least $1 million each. High-income professional service businesses — such as those of doctors and lawyers — are ineligible for the break, but owners of manufacturers and real-estate firms have an easier time qualifying.

 

Yes! 3 Credit Score Comebacks That’ll Give Home Buyers Hope

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By  | Oct 10, 2017

Realtor.com

repair-credit-score

Many who hope to buy a home come across the harsh reality that their past can come back to haunt them. Namely, late or unpaid bills might end up reflected in their credit score, the number that sums up how reliable you’ve been (or not been) at paying back past debts.

It your credit score is low (think below 650, with 850 being perfect), you might have a hard time finding a lender who will give you a mortgage. That’s the bad news, but here’s the good: There are things you can do to repair the damage and raise this little number well into home-buying territory.

Check out these three real-life credit score comeback stories to know it’s possible, and get some ideas on how to boost your own score.

1. ‘The house I loved was outside my financial reach’

How much his score changed: 680 to 740
How long it took: 1 month

Earlier this year, Jeff Neal had his heart set on buying a house he’d seen in Lancaster, PA. The problem? It was priced above what his local bank would loan him based on his credit score, which was 680. “After seeing the houses that were available in my price range, it was obvious that I needed to increase my potential loan amount,” he says.

So Neal, an entrepreneur, got resourceful and sold off a website he owned, then used the cash to pay off $9,000 in credit card debt in one fell swoop. Within a month, his credit score shot up to 740—and fortunately for him, the house he had his eye on was still on the market. So he pounced, and it’s now his.

Todd Huettner, president of Huettner Capital, a residential real estate mortgage lender in Denver, says paying down debt is a surefire way to boost your credit score. Doing so improves your debt-to-income ratio, a comparison of how much money you owe to how much you make. Better yet, the effects kick in fast.

“The impact of paying off credit card debt happens as soon as the creditor reports the update to the credit bureaus, usually monthly,” he says. However, ”even if you pay off small balances or pay down balances in small chunks to lower the utilization rate on any card, you will also see some improvement.”

———

2. ‘My wife raised my credit score’

How much his score changed: 530 to 713
How long it took: 2 years

Francis John, a content strategist from Sioux Falls, SD, says not paying his student loan bills on time ended up sinking his credit score to (gulp!) 530. That was so low, he couldn’t even get an $8,000 car loan. Realizing his dream to buy a house certainly wouldn’t be possible either, he set out to improve his score by turning to someone he knew could help: his wife.

Fortunately, his spouse had a good credit score—which could be used to boost his own. They opened a joint credit card, then took out a small $1,200 loan in both their names for a laptop. By paying toward both of these debts regularly, John was able to piggyback on his wife’s good credit standing (not to mention her good habits). Over the course of two years, he raised his score to 713, allowing them to qualify for a mortgage on their first home this year.

While getting a joint card or loan with a spouse with good credit can “drag up” a poor score, Freddie Huynh at Freedom Financial Network warns that it’s not without risks. If the holder of the poor credit score makes mistakes, he could also drag down the higher score.

“If a spouse has poor credit, the key is to determine the reason, and work on that,” Huynh says.

One safer alternative? Rather than co-signing a credit card, you can add the low-scoring spouse as an authorized user instead, which means that this person can use the card but the main cardholder remains the one responsible for payments.

———

3. ‘A home we already owned damaged our credit’

How much her score changed: Low 400s to low 700s
How long it took: 3 years

Think home ownership is always good for credit scores? Jennifer Avery, a consumer insights director from Orlando, FL, would argue otherwise.

“My husband and I had purchased a condo at the height of the housing bubble, in 2006—two kids in grad school who, like everybody else, thought housing prices were just going up, up, up,” she says. “Two years later, the value of our home plummeted, and we were $100,000 underwater on our mortgage.”

A job move required them to sell the house for less than what they owed their lender. While the short sale allowed the couple to bail on the home without filing for bankruptcy, it also took their credit scores from over 800 down to the low 400s, where they had no hopes of getting a new mortgage.

“It was a terrible blow,” Avery admits. “We felt a little better when we watched ‘The Big Short’ last year and saw that even the smartest people didn’t see it coming.”

Yet while their credit scores had taken a hit, Avery was determined to rebound—and took a bunch of small, consistent steps to make that happen.

“We built our credit back the same way we earned it to begin with—by paying our bills on time and not buying stuff we couldn’t afford,” she says. “We didn’t go on vacations. We cooked at home. Edgar and I didn’t even get each other presents at birthdays, Christmas, and anniversaries. All in all, we lived like we made probably 40% less than we do, so we could save fast.”

Their frugality has paid off, and within three years, their credit score rose to the low 700s—high enough that they’ve been approved for a loan on a new-construction home that should be done by the end of 2017.

“It’s been a long ride,” she says. “But we are almost there.”

For more smart financial news and advice, head over to MarketWatch.

 

 

HELOCs Are Resetting and Rates Are Rising: Here’s What Homeowners Should Do

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By Cathie Ericson | Jun 19, 2017

Realtor.com

Helocs-up

 

“Your HELOC is resetting” is a phrase you might be hearing a lot these days, and it sounds like something that might send your spaceship off its trajectory. But, if you’re not careful, it’s actually something that could send your budget off course.

The financial field is experiencing a perfect storm as multitudes of a popular financial product, the home equity line of credit, or HELOC, are coming due. Why now? Well, homeowners rushed to take out HELOCs in 2007—just before the housing crash, when property values were at a peak. That gave homeowners the flexibility to tap into much-needed funds during the rocky economic period of the past decade. But many of those HELOCs “reset” after 10 years, and with rising interest rates (just last week, the Fed announced another crucial rate hike), the mortgage math doesn’t look good. Your monthly payments could go higher—some by substantial amounts.

Let’s take a look at how you can deal with a resetting HELOC without busting your budget.

Why has my HELOC bill ballooned?

If you’re reading this, you probably already know what a HELOC is. But if it’s been 10 years since you reviewed your paperwork, here’s a refresher: A HELOC is a loan that allows you to borrow money against the equity you have built up in your home. Your lender figures out how much your house is currently worth, deducts what you still owe and offers you a percentage of the remainder as a loan.

What many borrowers don’t understand very well is that unlike their primary mortgage—whose interest rate is likely locked in for 20 or 30 years—a HELOC has a variable rate after the first 10 years. That variable rate is typically tied to the prime rate, which serves as a benchmark for lending rates. The prime rate increases when the Federal Reserve raises short-term rates.

HELOCs typically require interest-only payments for the first 10 years, after which payments on the principal kick in. So there’s a double whammy for homeowners who took out a HELOC in 2007: Not only are their principal payments coming due, but the rate on the loan is also poised to spike.

Now, we’re not trying to cause a panic; despite predictions that mortgage rates would rise throughout the year, they’re still historically low. The average rate for a 30-year fixed mortgage (the most popular home loan) is currently hovering at a seven-month low, despite several increases to interest rates since December. The Fed just hiked interest rates again, though, so the mortgage market could see some of that long-anticipated fallout.

How to handle a HELOC reset

This situation doesn’t have to be a disaster. You just have to do your homework to make the decision that’s best for your budget.

First—and most important—make sure you’re reading the correspondence from your lender and monitoring your statements each month so you’re not caught by surprise, warns Elizabeth Mitacchione, vice president of mortgages for Teachers Federal Credit Union, in Hauppauge, NY.

Evaluating your options could take some time, so you want to be clear on how and when the rate will change.

If your HELOC is poised to reset, you essentially have three choices: Pay it off, refinance it, or stay in your HELOC.

Option No. 1: Pay it off

Maybe you’ve been quite conservative when using your HELOC. It could be that you’ve just been spending a small amount of extra cash to spruce up your outdoor area or fix that leaky roof. Now that the project is done, you might well have the cash available to pay off your HELOC in one fell swoop. Done.

Option No. 2: Refinance it

Sorry, refinancing a HELOC isn’t cut-and-dried. You have three choices for how to handle it.

  1. Refinance into another HELOC: It’s a good time to look into this option, as many local banks and credit unions are currently very competitive with their rates, says Jesse Johnston of Philadelphia-based HOW Properties. HELOCs offer a variety of benefits, including the absence of closing costs and mortgage insurance, notes Joe Talmadge, vice president of mortgage lending for Northwest Federal Credit Union in Herndon, VA. However, he adds, “over time, the risk of having a large balance on a variable-rate loan with little protection from potentially rising rates could lead to more uncertainty than many people are comfortable with.” Also keep in mind that a new, comparable HELOC might not be possible if your home’s value has dropped over the past decade.
  2. Refinance it into a second mortgage: Many banks will allow you to convert your HELOC to a fixed-rate second mortgage without going through the process of requalifying for the loan all over again, Johnston says.
  3. Consolidate your first mortgage and HELOC into one: You may decide to do a full refinance of your first mortgage and HELOC while mortgage rates continue to be relatively low, Mitacchione suggests. Of course, that means you would need to pay closing costs, as well as go through the hassle of getting all your financial documentation together, notes Johnston.Option No. 3: Stay in your HELOC

    If you stay in your current HELOC, just remember that payment amounts will rise when the loan resets because you are no longer paying only interest. Your lender can walk you through the payment increase if you decide to just hold tight.

What Is a Reverse Mortgage? The Real Risks and Rewards, Revealed

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By  | Jan 25, 2017
Realtor.com
reverse-mortgage-2
designer491/iStock

Most home buyers know what a mortgage is, but what is a reverse mortgage? You’ve heard this term bandied about, and maybe have even seen the late-night TV ads promoting them. But people are often confused or all-out clueless on the details, so allow us to explain.

True to its name, a reverse mortgage is the opposite of a traditional loan, where you borrow a couple hundred thousand dollars from a lender and then slowly pay it back month by month—plus interest. In a reverse mortgage, your lender pays you, slowly turning the equity you’ve earned in your home back into cold, hard cash.

However, just because you qualify doesn’t mean this loan option is a good idea for you. Read on to make sure you understand the risks and benefits.

Who can get a reverse mortgage, and what are the benefits?

Reverse mortgages are available to homeowners 62 and older, and can be useful for seniors who may not have much in terms of income or assets. A reverse mortgage easily increases the amount of money they have coming in to cover various living expenses.

“Ideal candidates are those who want to stay in their home, owe little to nothing on it, and need more cash,” says Debbie Worley, president and loan officer at Lone Star Reverse Mortgage in Horseshoe Bay, TX.

The loan must be repaid when the last borrower, co-borrower, or eligible spouse sells the home, moves, or dies.

How much money can I get?

The amount you can qualify for is known as the initial principal limit. The IPL is determined by combining a home’s value, the homeowner’s age, the type of loan, and the interest rate. It’s rarely more than about 60% of the home’s value—and it tops out at $625,500.

There are a variety of ways you can receive money from a reverse mortgage. The standard disbursement options include the following:

  • Lump sum: You get a large chunk of money (though you can’t access all your equity at once).
  • Term: The borrower receives monthly payments for a fixed amount of time.
  • Tenure: The borrower receives monthly payments guaranteed to last until she dies or moves.
  • Line of credit: The loan amount can be accessed whenever the borrower needs money. And the sum grows in value, not due to interest but the assumption that the home appreciates with time.
  • Modified tenure/term: A combination of access to a line of credit and term or tenure monthly payments.

When do reverse mortgages need to be paid back?

A reverse mortgage can become due if the borrower fails to pay real estate taxes or homeowners insurance. But what’s more likely is that the borrower moves out or dies—that’s when a reverse mortgage’s outstanding balance needs to be paid off, says Warren A. Ward at WWA Planning & Investments.

In the case of death, the remaining equity goes into the estate. The heirs can still inherit the home as long as the loan is in good standing; in fact, if the heirs make the home their primary residence and meet the loan terms, the reverse mortgage can continue in their name.

The risks of reverse mortgages

In spite of these advantages, reverse mortgages have a bit of a sketchy reputation, largely due to misleading claims made by unscrupulous lenders. In the past, if only one member of a married couple put his or her name on the reverse mortgage—and that spouse died—the surviving spouse could face foreclosure.

Luckily, new laws and safety measures mandate that the surviving spouse cannot be kicked out.

But even though regulations and safety measures surrounding reverse mortgages have improved, these loans still have some sizable drawbacks. For one, they tend to have worse terms than other means of tapping your property’s value, like home equity lines of credit. Plus, the fees associated with a reverse mortgage can rip through a homeowner’s equity quickly.

For instance, an origination fee on a reverse mortgage can amount to a whopping 2% of the initial $200,000 of the home’s value, and 1% of the remaining value, with a cap of $6,000.

 

Also, keep this simple fact in mind: You’re basically borrowing money from yourself. Meanwhile, your lender is slowly nibbling away at the equity you’ve earned in your home. If you dream of leaving your home to your kids, you should think long and hard before you move forward with a reverse mortgage.

So even if turning your home into an ATM sounds tempting, think through various life scenarios before committing to a reverse mortgage. Shop around to get the right loan product, and check to see if a lender has had any complaints from past borrowers.

Because reverse mortgages can be complex, housing counseling is a must. The National Council on Aging offers counseling through its Reverse Mortgage Counseling Services Network, one of nine national counseling groups approved by the U.S. Department of Housing and Urban Development. There is an upfront fee of $135 for this service (which can be deferred depending on your budget).

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Looking to Buy a Home in 2017? Start Securing Your Financing Now

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By: Devon Thorsby

Real Estate editor at U.S. News

 

As we inch toward the end of the year, consumers and lenders alike begin looking toward the post-holiday season – the start of 2017 – and the potential for a home purchase in the coming year.

But whether this is your first home purchase or your seventh, home lending in 2017 promises to be different from recent years. On Wednesday, the Federal Reserve increased interest rates by 0.25 percent, or 25 basis points, the first increase since last December, making it the second rate hike in more than a decade.

“The bigger implication here is that I think in 2017, [the Fed] will continue to raise rates,” says Bob Johnson, president and CEO of The American College of Financial Services.

But Johnson notes that homebuyers shouldn’t assume they’ve missed the boat on securing a good, low-rate mortgage. Mortgage rates are independent of the Fed-set interest rate and fluctuate from week to week. Following Election Day, for example, mortgage rates increased by 37 basis points in a week.

“People overweight the recent time period in making financial decisions, and in the recent time period, rates were at an unprecedented low level. In fact, people were calling it the new normal,” Johnson says. “People were becoming very comfortable in a low-rate environment and expecting that to continue long into the future.”

[Read: Finding the Right Mortgage for You .]

Yes, the days of near-historically low interest rates are gone, but it’s important to keep in mind that the low-rate environment homebuyers have enjoyed over time is a result of a recession that has been difficult for the U.S. economy to recover from.

“Interest rates going lower is generally a function of a bad economy,” says Brian Colon, a loan officer with Supreme Lending in Delray Beach, Florida, adding that hopefully we won’t see something similar in the near future.

If you’re hoping to purchase a home with a mortgage in the next year, the best advice is to start getting your finances in order as soon as possible and shopping around for lendersthat would be a good fit.

“There is no 30-, 60-, 90-day window that is the most optimal. Certainly, the sooner you can start putting your ducks in a row, the easier it will be,” Colon says.

Acting now can also give you an idea of your mortgage options. And an understanding of how your financial situation translates to available mortgage programs can mean the difference between buying a home with three or five bedrooms, or looking at single-family, detached homes rather than condominiums.

“The sooner they start speaking to a mortgage professional, the sooner they can know what options there are, and the better path they can put themselves on in terms of knowing what’s available,” Colon says.

But getting a head start with prequalification or preapproval for a mortgage won’t guarantee you the interest rates you’re seeing today, as you can only lock in a mortgage rate for a loan when you have a property and scheduled closing date. If you’re not planning to buy until spring, expect a subtle increase in rates between now and then.

Colon says he’s working with clients who began the process back in September and October. “Now we’re having a conversation that interest rates are no longer 3.5 percent – today they’re 4.25 percent. So there’s a little sticker shock there, but ultimately you cannot lock in a loan until you have a contract, an address and a close date,” he says.

The expected steady increase of interest rates could also affect more marginal borrowers, says Tim Manni, a mortgage expert at personal finance site NerdWallet. “They might need to look at a different neighborhood or a different style of home because, obviously, a rising rate is going to affect the affordability somewhat,” he says.

[See: 10 Ways Millennials Are Changing Homebuying .]

All homebuyers should be as proactive as possible when it comes to understanding how their financial standing appeals to lenders, but here are three groups of buyers who should absolutely start now.

Anyone insecure about credit status. If you don’t know your credit score, and especially if you’re a little afraid of what it might be, begin speaking with a mortgage professional now about your options.

If you have bad credit, it’s possible you won’t qualify for a mortgage rate you can afford on a monthly basis. By addressing the worst early on, you can work with a f inancial advisorand take the steps to get on track toward homeownership.

“A lot of folks that know that they have credit challenges, or think they might have credit challenges, try to hide it for as long as possible because a lot of times they don’t want to face it,” Colon says. “But the reality is they need to face it so that you can actually start taking proactive measures to get it fixed and get yourself in a position to qualify.”

Small-business owners. Tax season is almost upon us again, and many self-employed consumers are already working with their accountants to ensure everything is in order for filing by April. Colon says it’s important to keep that potential home purchase in mind when looking at how deductions and adjustments are made for the previous year – it could mean the difference between qualifying for a mortgage and not.

“For your self-employed borrowers, before they file their tax returns, they should really be having a conversation with a mortgage professional to make sure they are in a qualifying scenario,” Colon says. “And if they’re not, what can they do when they’re working with their accountant to maybe show more income, not take as many deductions and push off some expenses to next year instead of this year, to get the tax returns more in line with qualifying.”

[See: The 20 Best Affordable Places to Live in the U.S. ]

Homeowners with adjustable-rate mortgages. The expected continued increase in interest rates over the next year means homeowners with existing, adjustable-rate loans – whether it’s a mortgage or home equity line of credit – would benefit from refinancing to a fixed rate.

“Adjustable rates can play really well in the market, and they can play really well when you’re in a period of lower rates,” Manni says. “But these things start to get hairy once rates become a little bit unpredictable.”

 

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Experts Warn Against Snuggling Up to Wraparound Mortgages By Clare Trapasso | Nov 8, 2016

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Mortgage-Signing

 

Uh-oh. A mortgage scam that targets the most vulnerable home sellers and buyers is making a comeback.

Wraparound mortgages, which bundle together the purchase of the home and the mortgage on it, might sound like a great idea for those who don’t have the credit to qualify for a loan. But it’s an idea that’s ripe for exploitation, say housing attorneys who have seen an uptick in this type of seller financing.

Typically, the homeowners need to sell their property in a hurry, say because they have to move for work. But they can’t find a buyer, so they turn to middlemen. These folks find buyers who are similarly eager to buy and not so savvy, who move into these homes and take over the mortgage payments. The buyers receive a title for the residence, but the mortgage remains in the seller’s name.

So far, so good, right? That is until the middleman, who usually isn’t regulated, starts pocketing those monthly mortgage payments and the bank forecloses on the home. Then the seller’s credit is ruined and the life savings the buyer plunked down on the home is gone.

“They’re taking advantage of poor people who don’t have a lot of knowledge about purchasing a home and putting them at great risk,” says K-Sue Park, an attorney at Texas RioGrande Legal Aid, who is representing a family who claims they were ensnared in one of these scams.

Her clients, Santa Martinez and Michael Moreno, lost about $22,000 on the El Paso, TX, home they bought because the middleman wasn’t turning their mortgage payments over to the bank, according to the El Paso Business Journal.

“It’s meant to be a fix for people who are falling behind on their mortgages,” Park says of wraparound mortgages. They can also help “a family who can’t access a traditional bank loan to buy a house.”

Wraparound mortgages were a big problem in the 1980s and 1990s, Park says. But then it was mostly replaced by subprime mortgages—which targeted buyers with bad credit and, typically, low income, who couldn’t really afford to become homeowners.

Real estate attorney Cassandra McGarvey, at Sanders Willyard in Houston, started seeing a resurgence of these loans about two years ago. They’re common in Texas, but are also done in other parts of the country, she says.

She recommends that sellers who need to sell in a hurry rent out their homes if they can’t find a buyer. Even if they lose money, at least their credit won’t be wiped out in a foreclosure.

And aspiring homeowners who can’t qualify for a traditional mortgage should work on their credit instead of signing up for one of these wraparound loans, says Park.

“Don’t fall into this trap,” Park says. “[Buyers] stand to lose everything.”

Clare Trapasso is the senior news editor of realtor.com. She previously covered finance for a Financial Times publication and wrote for the New York Daily News. Clare also teaches journalism at a local college, loves food festivals and bike trips, and enjoys playing with her dog..

Realtor.com

By: Clare Trapasso

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