Archive for the 'Real Estate' Category
I’ve been hearing a lot about this new $7,500 tax credit for first-time home buyers, which is part of the newly passed 2008 American Housing Rescue and Foreclosure Act. Is it as great as it sounds?
A new website has been put up with more information about this tax credit. Curiously, the fact that this “credit” has to be paid back over the next 15 years (or when you sell) is conveniently left out of the “At A Glance” section, and you have to scroll down to question #15 in their Frequently Asked Questions to learn about the repayment terms. Did I mention the site was created by the National Association of Home Builders? No way would they want to mislead potential home buyers, right?
To qualify, you must close on your new house between April 9, 2008 and July 1, 2009. A good summary of this tax credit interest-free loan is in this Fortune article:
The “first-time home buyer credit” is a temporary refundable, repayable tax credit equal to 10% of the purchase price of a home, up to $7,500 for singles and married couples filing jointly. (Singles who buy a house together get only $3,750 each, as do married couples filing their tax returns separately.) […]
But the way the credit works, it’s actually more like an interest-free loan. Two years after you claim this credit, you have to start paying it back. The payback comes over 15 years in 15 equal installments–meaning you owe an extra $500 on your tax return each year. Sell your house, and you have to pay the rest back that year from your profits. (No profits, no pay back. Also, if you die, your heirs are off the hook.)
The allowed credit starts being reduced once a single has $75,000 of modified adjusted gross income, or once a couple has $150,000 of income. The credit goes away entirely at $95,000 for singles and $170,000 for couples.
The justification behind a $7,500 interest-free loan is that it is supposed to ease the “pain” of having to come up with closing costs and a downpayment. But wait… Wasn’t the housing bubble caused in part by people being tempted into buying houses they couldn’t really afford because they didn’t need to first save up for closing costs or a downpayment? I find it ironic that our choice of “buyer assistance” is even more easy lending.
Now, of course I would still grab this tax “credit” if I was going to buy a house anyway. I’d happily take a 0% interest loan on $7,500 for any period. But why not just give us something simple and straightforward, like a check for $1,000? My guess is that the phrase “$7,500 tax credit” works better to pacify angry citizens.
Posted in Real Estate | 66 Comments »
Despite the drop in housing prices in many areas, I have still been noticing an increase in “affordable” housing projects that are meant for people earning around the median income level - not only low-income households. Even back in 2005, for many areas the median house cost between 6 and 12 times the median annual income. A cousin of mine had to line up and enter a lottery simply for the chance at buying an affordable housing development, but didn’t “win”. I saw a model unit of the condos, and they were very nice.
However, the obvious catch is that because you are buying well below market price, you can’t just turn around and sell it at market price. A reader AM recently e-mailed me some details about an opportunity in his area below. (I have edited it minimally for spelling and brevity.)
I am asking for your view on one of my biggest financial purchase - the home. It’s a newly built home in a great community, offered under affordable housing scheme of the county & city, so there are restrictions about selling the house and the price of resale. As buying a house is an investment also so I wanted to be double sure that is it a good ides to buy such a house. The covenant for resale says:
The “Resale Value” shall be derived from the Base Price of the property. The “Base Price” is the original price paid by the buyers now intending to sell the property. The Resale Value shall be equal to the Base Price plus an amount equal to 1.125% per calendar quarter for each year from the date of the original sale to Buyers to the date of the agreement for the resale from the buyer to a new purchaser, compounded quarterly.
Does this seems a reasonable enough return. Price of house under this scheme will be around $350,000 but similar new houses in the same community costs around $550,000. Obviously as per the covenant when I offer the house for sale at a later time first right of purchase is of County’s if county declines or doesn’t responds in 30 days it can be offered in market but only buyers with income restrictions can buy it (which will be lifted if it remains unsold for 3 months) but the new buyer will have to abide by resale value set by county. The term of covenant is 15 years, I can sell it at market price after 15 years but i can keep only the price as described above in the resale price, rest will go to county.
Does this sounds like a reasonable option both from getting a house and investment perspective? Reason I am interested in this is because I can not buy a normal house now for another couple of years and from next year I will be above the qualified income limit.
This must be near an urban area, if “affordable” housing is $350,000! This development also seems to be separate single family houses instead of the condos I am more familiar with. On the surface, the agreement seems to guarantee a yearly return of 5%, assuming the property is indeed priced at such a steep discount. A year or two ago, 5% might have been scoffed at - but now, I’m sure lots of people wish their house would appreciate 5% each and every year.
But is this a good deal, all things considered? Some thoughts:
- How’s financing? If you are getting a mortgage with 6% interest on something that will appreciate 5% per year for the first 15 years, is that good? Don’t forget the upfront costs to a mortgage like closing costs.
- How much to rent a similar place? I asked, and the reply was $2000-$2200 per month. Even with no money down, this would make the mortgage payment about the same as rent. (Assuming 30-year fixed-rate mortgage at current averages of ~6.1%.)
- Do you plan on staying? Is this house really what you want, or are you changing your desires (either making them bigger or smaller) to fit into this opportunity. If so, you might not need to worry about what happens in 15 years or so.
I’m sure I’m overlooking some things. Please, ask more questions about details of the offer and/or add in your own opinions in the comments below.
Posted in Real Estate | 17 Comments »
Most of my friends on Facebook show themselves doing something they love as their profile pictures. Hiking, partying, sitting on a beach. But ones that are now real estate agents? I get the standard “Hey, I’m a real estate agent!” pose. You know, the one that looks like a mix between Glamour Shots and something you’d find in a yearbook. I swear, they all go to the same photographer. I even found this parody of the situation:
Is this required to obtain your Realtor license? “You must slap your picture on everything possible. Any house you sell, your business cards, your MLS listings, billboards, your car. Please consider tattooing your picture and phone number on your child’s forehead.” Yes, I know that familiarity supposedly breeds trust. But it still creeps me out. You’d think consumers would have a better way to pick a real estate agent…
Posted in Real Estate | 27 Comments »
I couldn’t help but notice that two mortgage crisis petitions that people have sent me info about recently are pretty much in direct opposition of each other. Of course, both claim to represent the average middle-class citizen.
No Intervention
First up is the petition at AngryRenter.com. Their general message is that they are tired of both the borrowers and lenders who have contributed to these inflated housing prices. As I understand it, they think any intervention will simply keep housing prices artificially high, preventing existing renters (32% of households) the ability to buy their own home. Many are those that could have gotten no-doc, interest-only, zero down loans, but did not. They want no governmental intervention or “”bailouts”. I thought this chart was interesting:
7% of folks are either delinquent on their mortgages or in foreclosure? That’s seems like a lot, I wonder what a “normal” percentage is.
Lots of Intervention
The next one is by the Neighborhood Assistance Corporation of America (NACA). They place the blame squarely on the mortgage lenders, and want lots of governmental intervention to borrowers with adjustable-rate mortgages. They are very angry at the money being spent to keep Bear Stearns afloat. Specifically, the want the government to:
- Stop any future interest rate resets.
- Reduce the current interest rates to the initial rate.
- Impose a moratorium on foreclosures.
- Require restructuring of all troubled mortgages to an affordable long-term mortgage payment.
I am guessing they want the lenders to cover the cost of doing all of this.
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Posted in Real Estate | 30 Comments »
The slowdown continues in my neck of the woods - a recent house that had been stubbornly overpriced for over a year on my street (we actually made a verbal offer, but the seller wouldn’t budge) finally sold for over $120,000 less than its initial list price. I’m sure the relatively low purchase price of our house didn’t help. At least we are not hit by the collateral damage from foreclosures to condo owners who have never missed a payment. When a multiple units are being foreclosed upon, nobody pays the maintenance fees, which means the existing residents have to pick up the slack. Of course, this means less people want to buy into that building… creating a bad downward spiral.
However, some areas seems to be fairing better than others, even if only being one county over. In a recent speech by Ben Bernanke, he showed some interesting geographical heat maps revealing the variation in both foreclosure rates and price trends across the country. Keep in mind the graphs only go until the end of 2007.
You can find both the text of the speech and additional graphs at the bottom of this Federal Reserve page. Via Matrix via Mapgirl.
Posted in Real Estate | 20 Comments »
Maybe I just didn’t get enough sleep last night, but the media really has to do a better job to find people with problems that I can sympathize with. The title of this Fortune article is Good credit can’t protect borrowers from bad loans - “More and more home owners with high credit scores are falling behind on their mortgage payments. Here’s why.”
Trish Phillips had enough income to pay about $1,300, perhaps $1,400 a month for her home, which cost $279,900. The minimum payment on her option ARM was $1,276, but she was incurring interest of more than $2,000 a month. The difference of about $800 was added to her mortgage balance every month. […]
According to Phillips, who was making the minimum payments, that meant her monthly bill would jump to $2,300 after just a couple of years and then to more than $3,000 a year after that. She knew she couldn’t afford it and went for help.
Phillips admits that she didn’t clearly understand the loan terms before she closed on the house and says her mortgage broker didn’t explain them. She had misgivings but, “I was afraid of losing the down payment,” she said.
Okay, so why are people with good credit falling behind? Because they are also buying $300,000 homes without even understanding the basics of how their mortgage works. Even if you assume you can refinance, how are you going to do so if you can’t even afford the payment on an interest-only loan? She was actually increasing her loan amount each month.
As for Phillips, she managed to get her loan modified, with Sichenzia’s help. Her payment is now frozen for three years at $1,281 a month and her balance will not increase during that time.
Pretty nice. Wish I could freeze my loan balance for three 3 years while paying less than the interest accruing.
I have nothing personal against Trish Philips. If I were her, I’d be happy to save a ton of interest and have frozen payments for 3 years. Score for her, the crazy lenders should share the pain. But seriously, is this the best you can do? Aren’t there stories out there of people overcoming real problems which weren’t self-imposed? (Although it has since been removed, the original article showed her posing by her Harley Davidson.)
My problem with these stories is that if the house had appreciated in value, these homeowners would be perfectly happy with their risky loans. I don’t like that they get the upside, but no downside.
Question… If I sell you a Hummer and don’t tell you it only gets 10 miles per gallon, and shortly after buying it you can’t afford the gas to drive the Hummer anymore, is that my fault or yours?
Posted in Real Estate | 47 Comments »
I have organized all of my experiences as a first-time homebuyer to one central page. It’s huge, sometimes I can’t believe I wrote all that stuff. Hopefully it can be of some help so other folks. Although I have few things left, I seem to be close to wrapping things up.
Do you have any other questions about buying a home you’d like to see answered? Please leave a comment below. I’m sure I’ve missed some things. I continue to be amazed by how confusing and complicated the home-buying process can be. No wonder so many people simply make inflated offers and sign their mortgages without even reading them…
Posted in Real Estate | 18 Comments »
Continued from Part 1, where you should have figured out what type of loan you want to get, gathered copies of your important paperwork, and gathered a list of potential lenders. Now to narrow things down to one final lender.
III. Narrowing Down The List
To trim down your list, you may want to call some of them up and ask them a few questions.
1) What type of loans do they specialize in? (Don’t tell them what you’re looking for yet.)
2) What do you need for a rate quote and Good Faith Estimate? What is your quote? Many will give you a rate quite easily, but the GFE is sometimes harder without submitting private information. Just remember, any such quote is only as good as the information you provide.
3) How fast can they lock their quoted rate/points if you choose them? Can I lock this quote you just gave me today? Will they provide written lock confirmation? Will they guarantee their lender fees? (See below.)
Some other people throw in some quiz questions that relate to guessing future mortgage rates, but I don’t really care about that. Your final list might look something like this:
- A few Upfront Mortgage Lenders. These lenders have agreed to disclose accurate rates/points for the market niche they service, as well as guarantee their lender fees. At the very least, you should be able to get a good idea of a competitive current rate.
- First-time homeowner programs in your area, or perhaps you have a preferred lender for your housing project.
- Credit unions that are either local or otherwise restrictive (only teachers in your county, military affiliation, etc.)
- A broker that was highly recommended by a trusted friend experienced in real estate.
- A loan officer from a “big” bank, perhaps where you have an existing relationship.
IV. Compare Good Faith Estimates
When you apply for a mortgage, the government requires your lender to give you a Good Faith Estimate (GFE) within three days of your application. But you should be able to get one, or something similar to one, beforehand with no cost. When done, you should have GFEs from about 2-5 people to compare side-by-side. The actual document looks like a huge list of different fees and can be pretty confusing, but you need to simply break it down into three parts:
a. Interest Rate / Discount Points
- Use interest rate, not APR
- Also note lock period
b. Fees Paid To Lender (Add these all up)
- Application Fee
- Commitment Fee
- Rate Lock Fee
- Origination Fee
- Funding Fee
- Administrative Fee
- Transfer Fee
- Processing Fee
- Loan Set-up Fee
- Wiring Fee
- Discount Fee
- Flood Certification Fee
- Tax Service Fee
- Underwriting Fee
Read the rest of this entry…
Posted in Real Estate | 14 Comments »
Shopping for my recent mortgage loan was a pain. It shouldn’t be this hard! I had hope for Zillow, but a recent quote request for my same loan only got two offers from lenders, both of which weren’t very good. Ah well. Until it gets better, here’s how I would go about things if I could go back and do it again.
The Primary Goal
The most common pitfall with mortgages is the classic bait-and-switch. They lure you in with a rock-bottom rate and low closing costs… until signing day when your final HUD-1 statement looks completely different. Fees get changed, and by then is really hard to back out. Good Faith Estimates are not legally binding, and there is no real penalty for lying on them. In addition, interest rates change every day. If they don’t list their rates publicly, how do you know if the next day you’re still getting their “best” rate? “Oops, rates went up!”
I think the best thing to do is to be prepared, so that when you are ready you can go out and obtain some firm rate quotes, and lock it in. I would not sleep well until I had a loan commitment from the lender, an agreement on closing costs, and a signed rate-lock letter.
I. Prep Work
- Learn about mortgages. Many people rely on their mortgage broker to tell them what kind of mortgage to get. This is nice, if you have a honest, unbiased broker. This is also how people got talked into 0% down subprime adjustable rate mortgages. I hate the idea of signing up for something you don’t understand. Some reading suggestions: Fixed or adjustable? Loan term? Paying Points?
- Fill out a Uniform Residential Loan Application. You’re gonna have to provide this information anyway, so why not do it ahead of time. Download it here.
- Save and/or make copies of all your supporting documentation. For a full-documentation loan, you will need at a minimum your last two months of paystubs, bank statements, and investment statements. (More assets is better, but for simplicity I only provided my primary accounts and left out the ones with tiny balances.) You’ll also your last two years of tax returns. If you’re self-employed, they’ll want two years of those returns as well, including your accounting books for this year. Collect whatever else might be important, including any divorce or bankruptcy paperwork.
- Get a copy of your credit report from all three bureaus. Getting reports should be free. A score is also helpful, but not necessary since they will pull their own scores anyways. See here for ways to get a free credit score. Check for inaccuracies, and get them fixed as soon as possible. File dispute forms online at each bureau, and follow up.
II. Find Potential Lenders
This part should be pretty easy. Suggestions:
- National credit unions - Navy Federal, Pentagon Federal (1st and 3rd largest in the US)
- Local credit unions and banks
- Huge national banks
- Upfront mortgage brokers
- References from Realtor, family, friends
- Websites, both from aggregators and direct lenders
If you’re in the military or have direct family in the military, check out Navy Federal Credit Union for some great rates. I’m trying to sign up my family member right now in preparation for our next mortgage.
Some of this is personal preference, but I think most brokers and websites have access to the same general rates for common conforming loans, because they rely on what the secondary wholesale market is providing. Credit unions and local banks sometimes lend their own money, which means their rates might be better (or worse).
Next time: Comparing Offers, Negotiating, etc.
The post is a new addition to my Experiences in Buying A Home.
Posted in Real Estate | 18 Comments »
I am now the proud owner of over $7,000 in hardwood flooring. It cost as much as my car! We charged it to our Citi Cashreturns card in order to grab the extra cashback at the time, which saved us another $350 on top of the $400 we got back last month for paying our taxes owed with it.
Types of Flooring Available
If you’ve ever thought about installing your own flooring, here is a quick review of our thought process. There are three major choices these days:
- Laminate Flooring. Also called “Pergo”, after a popular manufacturer. This is essentially a picture of what hardwood looks like, glued on top of wood chip composite. Think Ikea furniture. It the cheapest type, you can easily install it yourself, but it can’t be refinished.
- Traditional Hardwood Flooring. This is a entire piece of solid hardwood. More expensive, hard to install yourself, can be refinished multiple times, will probably outlive you.
- Engineering Hardwood Flooring. This is 1/16″ to 3/16″ of real hardwood glued on top of a plywood base (see picture). It costs about as much as traditional hardwood (or even more if comparing to unfinished hardwood), but you can install it yourself which can result in a net savings. With a quality floor, you can still refinish 1-2 times if desired.
Our Decision
Unless you’re really experienced and have lots of time, most DIY people either choose laminate flooring or engineered hardwoods. We first looked at laminate, aka “Pergo”. Laminate flooring is really affordable, starting at about $1.50 per square foot (sf). It can also be more scratch-resistant. However, if a scratch or a moisture bubble does occur, you can’t really do much about it. I think laminate is a perfectly fine flooring choice, but we personally did not like the look of it. I’ve been to nearly 100 open houses, and I can spot laminate flooring instantly; it simply does not look like real hardwood.
I’m probably biased though, because our last two houses both had some beat-up hardwood floors that were over 50 years old, and we loved the the look. Scratches, dents, and age simply added character to us. With a good engineered hardwood, you can get a wear layer that is nearly as thick as solid hardwood, and can also last indefinitely. In the long run, we felt that paying more for the look and durability of real hardwood was worth it to us. After installation, you can’t tell the difference between solid hardwood floors. A high quality engineering hardwood can cost $5/sf or more, but they start at around $3/sf.
Resale value wasn’t really a huge concern for us, but is something to consider. I’m sure real hardwood flooring adds more value to a house, but I don’t know if all of the cost differential between hardwood vs. laminate is recovered.
Installation
The easiest type of installation for a weekend warrior is the floating floor setup. First, you need a flat subfloor. This could be an old floor like vinyl, ceramic, or even an old hardwood floor. Second, you place a thin foam underlayment on that subfloor, which smooths out minor imperfections and also serves as a noise and moisture barrier. Third, you either click or glue together the hardwood pieces so that you have one huge piece of flooring that “floats” on top. Nothing is nailed or glued directly to the house.
Easier said than done, of course, but that’s the basic idea. Here are some tips by a professional installer, as well as some pictures from a DIY amateur. Wish me luck!
Posted in Frugal Living, Real Estate | 28 Comments »
If you’re shopping for a new mortgage, there is now another option out there. The Zillow Mortgage Marketplace attempts to make connecting borrowers and lenders as effortless as typing a search on Google. Will it work?
Application: Less Nosy, But More Responsibility
While shopping for loans, I had two big worries. One, I didn’t want to give out my Social Security number to everyone. Two, I didn’t want 100 desperate brokers calling me all day long “fighting” for my business. No problem with Zillow, you only need to fill out a application with your property details, your credit score, your income, and your assets. This is all the information that a loan officer needs to provide you a quote.
To see your loan offers, all you need to do is sign up with an e-mail address. No SSN, no name, no address, no telephone.
But you really want to avoid painting a rosier picture than reality, which is what most people tend to do. If your info is wrong, then the lender’s quote is null and void, and everyone’s time was wasted. Check your credit score beforehand, ideally at all three credit bureaus. It’s one thing to say you make $X per year, it is another thing to prove it. For a full-documentation loan, you need to have two years of W-2 forms, your last tax return, and your most recent bank statements. They will want everything! I’d even say it’s a good idea to pull these up before filling out this form.
Comparing Bids and Feedback Ratings
Participating lenders are supposedly verified to make sure they are licensed brokers without excessive complaints filed against them. Bids are also required to be specifically tailored to your loan, not just generic rate instantly created by a computer. In addition, Zillow is adding a feedback system (like eBay) where you can help determine the reputation of lenders (service, extra fees, if they bait-and-switch, etc.). The system is probably too new for this to matter right now, but hopefully it’ll help in the future.
I submitted an application today for a home equity loan, but I haven’t gotten any bids yet. However, I do like that all the loan quotes will be organized in the same format, so you can compare loan offers side-by-side easily. Sometimes it’s a puzzle to figure out all the lender’s fees in Good Faith Estimates.
Finally, lenders will be able to see what other lenders have been offering you. This gives them a chance to see their competition, and even lower their initial bids. I don’t see anything wrong with that. 
Once you pick out a lender to contact, then they will see your e-mail and you can move forward with the loan.
I couldn’t find any information about how Zillow is making their profit from this. I’m assuming they will charge a fee per lead or per closed mortgage.
More info: Zillow Press Release
Posted in Real Estate | 17 Comments »
While I tend to be straight-laced when it comes to taxes, I also think it is our right - heck, even our duty - to pay as little taxes as legally required. I take every deduction that I can substantiate. While learning about property taxes, I read that somewhere between 30-60% of homes in many areas are over-assessed. If the estimated assessment value is too high, then those homeowners are paying too much in taxes! In areas of dropping home values, you may be able to get your assessment lowered.
But don’t expect anybody to tell you this. From this 2000 and 2004 articles about property taxes, both from CNN Money:
“It’s an unfair system,” Lewis said. “You can go to one particular block in Long Island, for example, where 11 houses got a tax reduction last year because they filed grievances. The remaining 4 homeowners who didn’t file a grievance are still overpaying. In most municipalities, if you don’t file it means you accept the assessment value of your home.”
“The bottom line is that if homeowners aren’t focused on what has happened in their marketplace, they are paying too much in property tax,” says John Brusniak, a Dallas property tax lawyer.
My sister-in-law recently contested her assessment and successfully got a reduction in her property taxes. The way to do it seems to be for (1) each homeowner to do a little research as to how their local government does their property taxes, (2) figure out if they are over-assessed, and then (3) file an appropriate appeal if necessary.
How Are Assessments Calculated?
This varies between states and even counties, but it could be based on:
- the sales of comparable homes in your neighborhood,
- the replacement value of your home, or how much it would cost to build your home from scratch at current material and labor costs,
- a multiplier of how much rental income your property would produce,
- or the most recent purchase price, plus an inflation adjustment.
You can usually find an assessment report at the tax collector’s office showing you how they got their number. Now you have to reverse engineer things to figure out how you can argue it back down. For example, you might have comparables with lower prices, or they might have marked down your square footage or other details wrong. Use sites like Zillow or Domania as well, since they can be based on tax records. Ideally, you’ll find a house just like yours, but with a lower assessment value.
The Appeals Process
Check out your local state website. If you live in California, there is this Guide to Residential Property Assessment Appeals. In New York, they have a Guide to Fair Assessments For Property Owners.
After looking at a few examples, some places seem to have a written from you can fill out first (an informal review). From this SF Chronicle article:
If your home is worth less than you paid, chances are you also can get a temporary reduction in your property taxes - without a battery of lawyers or dubious arguments about functional obsolescence. Just ask your county assessor for an informal review of your assessed value. It’s free and easy to do yourself. […] In most counties, you can simply call or write your assessor’s office or download a form from its Web site and mail it in.
If that fails, then you might have to perform a formal appeal which involves meeting with officials and assessors face-to-face. It doesn’t seem all that complicated, besides building up your evidence the most important thing to have is persistence. Hurray for bureaucracy!
p.s. If you’re selling your home, consider that a lower assessment (and thus a lower tax bill for the new owner) can help you sell your home faster or even for a higher price.
Posted in Real Estate, Taxes | 16 Comments »
We are considering renting a room to one of our siblings temporarily. She’s moving out here for a new job, and since we live in an pricey area living with us will offer her a way to save up some money. On our side, we are two people with four bedrooms, so we have plenty of room right now.
Of course, horror stories abound when renting to family members. I don’t know what to say about that. I don’t foresee it being a problem as we are pretty close, and we are all responsible professional adults, but I’m sure everybody else says that as well. Being that we recently rented a unit from a another family member successfully, I also feel good being able to “pay it forward”.
The Plan
We would collect “rent”. The idea is that she would pay 1/3rd of all utilities (gas, electric, water, garbage, cable, internet) plus some buffer for other miscellaneous household maintenance items. This obviously will be much less that what it would cost to share an apartment on the open market, let alone a studio. So she’s paying her way, but we aren’t making much profit if any, ideally preventing any guilt or resentment on either side.
The Problem: Fair Rental Price
But then I did some research about the potential tax implications. Is rent always taxable income, even if from a relative sharing a home? From what I can tell, the IRS says yes. (Someone please correct me if I’m wrong.)
However, if I am reading the IRS “Renting to Relatives” regulations right, the good news is that if I rent out the room at “fair rental price”, I can start deducting a portion of my expenses - including interest, taxes, repairs, maintenance, utilities, insurance, and depreciation. This has the potential to offset the rental income completely (resulting in no net tax owed), although I can’t create a loss since it’s my personal home.
The bad news is that if I don’t charge fair market rent, then I can’t deduct anything. 100% of the rental income is now fully taxable as passive income. Having to pay taxes on money that is basically covering the utilities just doesn’t sound right.
Solution?
From anecdotal evidence, I’m sure compliance is spotty at best in this area. What if a son pays $200/month to live with Mom and Dad? But to fall in line with the rules, it seems like I should either (1) charge something close to “market” rent and maybe buy her a nice gift later or (2) not charge anything at all. My idea was simply have her pay some of the utilities directly. This way I don’t actually accept any money. Any suggestions?
Posted in Family, Real Estate, Taxes | 48 Comments »
About My Credit Card Debt
If you’re a new reader, let me first explain my high levels of credit card debt. I’m actually taking money from 0% APR balance transfer offers and instead of spending it, I am placing it in high-yield savings accounts that actually earn me 4% interest or more, and keeping the difference as profit! 
Along with other deals that I blog about, this helps me earn extra side income of thousands of dollars a year. Recently I put together a series of step-by-step posts on how I do this. Please check it out first if you have any questions. This is why, although I have the ability to pay the balances off, I choose not to.
Cash Savings and Emergency Funds
As stated last month, our immediate goal is to replenish our cash savings in order to have at least a 6-month emergency fund. (9-months would be better.) It feels a bit scary not to have a big pile o’ cash right with such a big mortgage to pay. I’m even holding off on my Solo 401k contributions for the time being. However, we decided that we will start funding her 403b plan through a regular monthly withdrawal to reach the max of $15,500 for 2008 (about $1,500 per month). Currently, we are about halfway to this goal.
After the e-fund is created, we plan to start paying down our 2nd “piggyback” mortgage which is at nearly 8% interest. I feel that at 8% interest even with an interest itemized deduction that the payoff is worth it. With US Treasury bond yields so low right now, this also works well into the concept of treating additional mortgage payments as increasing your bonds allocation. Where else can I find a low-risk bond are paying a 8% coupon.
Lazy Home Equity
Previously, I considered a few different ways to track home equity, one of which was using the formula of Home value - Loan balance. My home value is subjective and probably going to decrease. My loan balance will inch up a small bit after each mortgage payment. I’m not too excited about tracking either one, so I’m only going to estimate this once every six months or so. So no change this month. Sound reasonable?
Retirement and Brokerage accounts
Not much action here, I’m boring. Market prices are still slightly down. I need to put together another portfolio update soon.
You can see our previous net worth updates here.
Posted in Goals, Investing, Real Estate, Retirement | 31 Comments »
When you look at price quotes on mortgages, you should always note both the rate and the points. A discount point is one percent of your loan. So paying 1 point on a $200,000 mortgage costs $2,000. Usually this is paid upfront as part of your closing costs, but some people also finance their points (roll it into an existing or new loan). The more discount points you pay, the lower the interest rate on your mortgage.
For example, here are some quotes that I pulled up today for a $400,000, 30-year fixed-rate loan:
| Loan |
Rate |
Points |
| #1 |
5.000% |
3.326 |
| #2 |
5.500% |
0.965 |
| #3 |
5.625% |
0.461 |
| #4 |
5.750% |
0.000 |
So you have to ask whether you would you rather pay
- a higher amount upfront + lower monthly payments?
- or a lower amount upfront + higher monthly payments?
The general logic is pretty simple. Let’s say your local gas station asked you to pick between these two scenarios for buying gas:
- $100 upfront + $2 per gallon.
- Nothing upfront + $3 per gallon.
You could probably do the math pretty quickly to see how many gallons you’d have to buy to break even. After that point, you’d be happily buying cheap gas and saving more money each subsequent fill-up. But if you don’t use much gas or might move away from the gas station soon, you may never reach that point and never make back your upfront outlay.
In reality, there are additional complications like “what would my unused money be earning?” and “what about tax-deductions?”, so the easiest way to do this calculation with mortgage rates/points combos is to use an online calculator like this one at the Mortgage Professor.
Let’s use it to compare Loan #1 and Loan #4 above. I put in the following info:
…and receive these results:
Taking Points or Not: Will You Keep Your Mortgage 4-6 Years?
So if you keep the loan less than 4.83 years, you won’t quite make up your upfront points paid. But after 4.83 years, each monthly payment you make will mean you saved more money over the higher rate loan. ($10,000 after 10 total years in this case.)
So the question is - how long will you stay in your home? The weird thing is, almost all loan rate/point combos that I’ve seen give you a break-even period of about 4-6 years. Even if you take as little as 0.50 points. So that’s the magic number. More or less than about 5 years?
I’ve read stats that say the average mortgage lasts about 7 years. But you should know yourself better than some average. Is this a starter home? How stable is your job? Are you rooted to the area due to family or other reasons? If you think you’ll stay less than 5 years, don’t pay points.
How Many Points? Well, How Confident Is Your Guess?
Now let’s compare Loan #1 and Loan #2, only have a difference of about half a point. The breakeven period is now 4 years, with only a $2,187 advantage over 10-years. So here both the risk and potential reward is less. If you’re wrong and you move earlier than 4 years, you might be out a thousand dollars or so. But even after 10 years, your advantage would only be about $2,000.
So, the more points you pay, the bigger the bet you make that you’ll stay past the break-even period. You could pay 4+ points or more if you really wanted to.
Update: As commenter Ted has pointed out, paying points also reduces your ability to refinance to a lower rate mortgage before that break-even period. So room for rate drops should also be put into consideration.
As for us, we definitely felt that we were going to stay longer than 5 years, but didn’t want to “bet” that many points. So we ended up paying 1 discount point to lower the rate on our loan to 5.625% at the time. I really don’t expect for rates to drop far enough lower so that a refinance would be worth it, but I could be wrong.
Finally, you should always compare different rate quote combos from different lenders. One lender might not have the best zero-point loan, but might have a relatively awesome 2-point loan. Don’t be afraid to ask for additional rate/point combinations if you don’t get them at first.
The post is a new addition to my Experiences in Buying A Home.
Posted in Real Estate | 21 Comments »
