What Are The Tax Benefits Of Homeownership?

Tax season may feel like a burden for some Americans, but homeowners have plenty of advantages when it comes to claiming deductions.

The U.S. tax code is designed to offer incentives to homeowners, and by taking advantage of these breaks, 1040-filing citizens can maximize their financial investment in homeownership.

Whether a home is financed via a mortgage, or paid-in-full with cash, there are a multitude of tax-savings opportunities associated with owning a home. Of course, every homeowner’s financial situation is different, however, so please consult with a tax professional regarding your individual tax liability.

Tax Deduction : Mortgage Interest Paid

Mortgage interest paid to a lender is tax-deductible and, for some homeowners, can provide a large tax break — especially in the early years of a home loan. This is because a standard mortgage amortization schedule is front-loaded with mortgage interest.

At today’s mortgage rates, annual interest payments on a 30-year loan term exceed annual principal payments until loan’s 10th year.

Mortgage interest tax deductions are extended to second mortgages, too. Interest paid on refinances, home equity loans (HELOAN) and home equity lines of credit (HELOC) is tax-deductible as well. However, restrictions apply on homeowners who raise their mortgage debt beyond their property’s fair market value.

In addition, the Internal Revenue Service (IRS) imposes a $1 million loan size cap. Loans for more than one million dollars are exempt from this tax deduction.

Tax Deduction : Discount Points

Discount points paid in connection with a home purchase or a refinance are also tax-deductible. By way of definition, a discount point is a one-time, at-closing fee which gets a borrower access to mortgage rates below current “market rates”.

For example, if the market mortgage rate is 4 percent, paying 1 discount point may get you access to a mortgage rate of 3.75%. The IRS treats discount points as “prepaid mortgage interest” which, in turn, makes them tax-deductible in most cases.

When you pay discount points in conjunction with a purchase, the points may be deducted in full in the year in which they were paid. With respect to refinances, discount points are typically amortized over the life of the loan such that 1 point is deducted at 1/30 of its value per tax-calendar year.

There are additional qualifications to meet in order to claim discount points. Your accountant can help.

Other Deductions : Property Taxes, Renovations, Home Office

Real Estate Taxes

Homeowners typically pay real estate taxes to local and state entities. These property taxes may be deducted as an expense and income in the year in which they are paid. If your mortgage lender currently escrows for your taxes and insurance, you can expect an annual statement to file along with your federal tax returns.

Home Improvements

For tax-paying homeowners, certain types of home improvement projects may be tax-deductible, too — specifically ones made for medical reasons. For example, if home renovations are made to accommodate a chronically ill or disabled person, and do not add to the overall value of a home, project costs are entirely tax deductible. Repairs made for aesthetic purposes are not eligible.

Home Offices

Homeowners who work from their residence can typically deduct expenses used for maintaining qualified home offices. These deductions include everything from renovations to the cost of utilities. However, there are several conditions for claiming home office space on your tax returns, and the rules can be tricky. Before claiming a home office, speak with an accountant to understand the benefits and potential liability.

Homeowners : Budget For Your Tax Breaks

Homeowner tax deductions reduce the annual costs of homeownership, but they’re far from a qualified reason to buy an actual home. Tax law can (and does) change frequently so consider whatever deductions to which you’re entitled a bonus.

Build your housing budget with the help of a tax preparer, if you’d like. Get a feel for how much home you can afford — before and after accounting for tax breaks. And, as you build your budget, make sure to use legitimate mortgage rates.

See more from Dan Green via What Are The Tax Benefits Of Homeownership?.

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Top 10 Home Buying Tips for Short Sales

According to RealyTrac’s 3Q12 report, short sales of properties not in the foreclosure process increased 15 percent from the previous quarter and were up 17 percent from the third quarter of 2011. These non-foreclosure short sales accounted for an estimated 22 percent of all residential sales.  Based on that it is inevitably that a home buyer will come across one or more properties currently classified as a short sale. A short sale is a sale of real estate in which the proceeds from selling the property will fall short of the balance of debts secured by liens against the property, and the property owner cannot afford to repay the liens’ full amount.

The entire short sale process hinges on the hope that the bank will take a loss now, approve the sale, and eliminate the costly process of foreclosing, clearing, and reselling a home. Obviously, this is a big hope on behalf of prospective home buyers as well and they need to understand some things in order to lessen the chance for disappointment of unapproved short sales. This is what they should know:

Price is usually set by the agent & seller, not bank – The agent and seller often create a very low asking price in order to attract buyers. The bank is normally unaware of the asking price; however, the bank has the final say in what an acceptable offer will be. Since the bank has the power to ultimately accept or deny offers, their lack of price awareness often leads to the process taking longer than anticipated. The bottom line is that the buyer needs to remain positive and patient throughout the entire process, sometimes even for months.

Loans owned by 1 bank usually better than 2 or 3 – If the seller has loans owned by two or 3 different banks it is a lot more difficult to approve the short sale. This is something the agent or the buyer cannot control; it simply depends on the willingness of the bank or banks involved.  I currently have a short sale with 3 lien holders and the 3rd lien holder is holding up the whole process.

Low-ball offers get slow or no response – Remember that the bank is typically unaware of the pricing during a short sale. When lowball offers stream into the bank they are often scoffed at and rejected, giving the prospected buyers little or no feedback. Surprisingly, it may also take painstakingly long to hear back even on good offers due to the high volume of transactions lenders are inundated with these days.

Agent must check “comps” before submitting offer – The agent must be sure to check recent home sales in the area to give buyers a better idea of the properties that are selling. This will give the agent and the seller appropriate grounds for an asking price that will be more likely to be approved by the bank. Checking comparables will also give the buyer a better knowledge of what price homes in the neighborhood are selling for and ultimately make them a more informed home buyer.

Don’t hang your hat on the property – Short sales aren’t necessarily “short.” It can sometimes be a very long process. Don’t get your hopes up for just one property, keep your options open and continue to actively look at multiple properties. Buyers must remain optimistic, the right property will come along. In most areas it is completely legal and risk-free to have multiple offers out at any given time with the proper contingencies.  I have one buyer who has been waiting for more than a year to close on a short-sale property.  Make sure you don’t order an appraisal until the short-sale has been approved so you are not out of pocket that expense.

Sellers with other properties or too strong of financials may not qualify for short sale and/or may be asked to pay the difference – Sellers that own more than a handful of properties or have an extremely large net worth will probably not be eligible for short sale. In some cases the seller will be asked to pay the difference of the sale. The seller might even need to sign a promissory note stating that they will pay back all or most of the debt. This has virtually no effect on the buyer as long as the seller cooperates.

“Approved” prices are quickest – It is important to remember that short sales are not always timely; however, making an offer on an “approved short sale” can be a quicker process. An “approved short sale” has a price that has already been given the green light by the bank. This could be due to the fact that another interested buyer made an offer that was approved, but didn’t end up buying the property. These types of short sales are some of the most highly desirable.

Some banks look want strongest buyers, some want strongest offers – The bank has all the power in approving short sales. The bank can pick the most appealing buyer, which may mean different things to different banks. Some banks may prefer the buyers with large down payments while others just want the highest price regardless of down payment. Many buyers want to know if they will get a deeper discount for an all cash offer. This is very hard to predict and one will never really know until they make an offer. As long as the buyer is surrounded by a good team we would advise them to do just that.

Repairs are seldom done, credit is more frequent – If there are improvements that need to be made on a home, even if they are necessary to get a loan, it is often unlikely that they will be done. Typically there is some sort of credit issued and the buyer must take the responsibility of fixing anything that is broken.

When you get approval, must close on time – During a short sale there is no leniency with the closing escrow date as there often is in a traditional sale. During a short sale, exceptions are rarely made and the buyer must close on time. Because of this, it is important to take care of all loan paperwork immediately after opening escrow. We’d advise buyers to be extra prepared and try to have the loan finalized a few days in advance of the closing date. If there is going to be an issue that will prevent closing on time, a request for an extension will need to be made immediately. If the request is made early enough, many banks will grant an extension but don’t just assume it will happen.

Conclusion
Short sales can be a great opportunity to find your new home at a competitive price. A Short sale could also be a major headache that lasts for months. It is important to have a good understanding of the factors that lead to a successful short sale to make it an enjoyable and profitable experience. I hope that these tips will help you to remain positive and optimistic throughout the process.

Restarting Mortgage Finance: Step 1

Recently the Consumer Financial Protection Bureau (CFPB) released a much anticipated rule that finally gets the ball rolling on reform of the mortgage finance industry. Investors fled the market following the housing bust, reducing the flow of financing to borrowers. Likewise, many homebuyers were sold mortgage products that were untenable, resulting in damaged credit and lost savings. Transparency, verification and documentation are keys to restoring confidence from investors and homebuyers. The majority of the market will benefit from the new QM rule, but a subset of the market will likely face higher prices or lose access to financing all together.

The Qualified Mortgage rule, or QM, lays out basic requirements for lender underwriting. In short, the originator of the loan must verify all sources of income and assets and verify that the borrower has the ability to repay the mortgage (ATR). A number of loan types are prohibited from receiving the QM statu,s including those with negative amortization (balloon payments), interest-only features, as well as those with durations greater than 30-years. Finally, there is a cap on fees that lenders can charge of 3% (with an exception for loans under $100,000) and the back-end debt to income ratio (DTI) must be less than or equal to 43%.

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2013 Roadmap For Home Buyers And Investors : The Improving Market Index

Improving Market Index for February 2013According to the National Association of Home Builders (NAHB), the so-called Improving Markets Index has grown to include 259 metropolitan areas nationwide.

To be deemed “improving”, a U.S. city must show broad-based job growth, housing growth, and a rise in median home prices. The index has increased more than 10-fold since October 2011, the month largely thought to represent the housing market bottom.

72% Of U.S. Cities Now “Improving”

The Improving Market Index is a monthly metric from the NAHB.

In order to qualify, a given metropolitan area must show six consecutive months of improvement with respect to real estate, as measured by home price information from Freddie Mac; with respect to employment data, as measured by data from the Bureau of Labor Statistics; and, with respect to new housing construction, as measured by data from the Census Bureau.

In February, 20 cities were added to the Improving Market Index, from all across the country.

Rockford, Illinois and South Bend, Indiana were added; as were New York City, New York, Racine, Wisconsin and Huntsville, Alabama. Even California and New Mexico added cities to the index, with Chico and Albuquerque making the list.

All 50 states now have at least one major city on the Improving Market Index. Washington, D.C. is included as well.

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What’s Ahead For Mortgage Rates This Week: February 11th, 2013

Mortgage rates worsened last week in response to more indications that the U.S. economy and global economic trends are improving. Global economic data was stronger than expected; which generally boosts investor confidence and leads to higher mortgage rates across the country.

According to Freddie Mac, the average rate for a 30-year fixed rate mortgage was 3.53 percent with borrowers paying all of their closing costs and 0.8 percent in discount points along with a full complement of closing costs.

The U.S Department of Commerce reported that Factory Orders for December improved over November; they rose from 0.0 percent in November to 1.89 percent in December, but fell short of Wall Street’s expectation of 2.5 percent.

The ISM Services Index for January was released Tuesday and fell to 55.2 from December’s reading of 56.1 and was slightly higher than against investors’ expectations of 55.0. Readings above 50 indicate expansion of the service sector of the economy. The ISM Services Index is also an indicator of future inflationary pressure.

Homebuilders Say Markets Improve For 6th Consecutive Month

On Wednesday, the National Association of Home Builders (NAHB) released its NAHB/First American Improving Markets Index (IMI), which provided good news for housing markets in all 50 states and Washington, D. C. Metro housing markets surveyed showed expansion of improving markets for the sixth consecutive month.

259 of the 361 metro areas surveyed in the IMI showed improvement in February. By comparison, only 12 improving metro markets were reported for September of 2011.

Increasing home prices and mortgage rates suggest that now may be the time for buying a home.

The weekly Jobless Claims report released on Thursday indicated that 366,000 new claims were filed, which was higher than Wall Street’s estimate of 360,000 new jobless claims, but lower than the previous week’s 368,000 new jobless claims.

Falling U.S. Trade Deficit Signals Economic Uptick

The best economic news for last week came on Friday, when the U.S. trade deficit fell to its lowest level since January 2010. The Trade Balance Report for December shows the trade deficit at -$38.5 billion against expectations of -$46 billion and November’s deficit of -$48.7 billion. While a great boost for the economy, this is another indicator that recent low mortgage rates and home prices may soon become history.

Economic News scheduled for this upcoming week includes U.S. Treasury Auctions set for Tuesday, Wednesday and Thursday.

Retail Sales for January will be released on Wednesday and watched closely by investors. Retail sales account for approximately 70 percent of the U.S. economy and are viewed as a strong indicator of the economy’s direction.

Jobless Claims on Thursday, Industrial Production and Consumer Sentiment on Friday round out the week’s economic reports.

Ready To Withstand Any Invasion

Snow FortI don’t know about you but I love winter.  The more snow the better (having all-wheel drive makes it easier to feel this way).

There is something so innocent about kids making snow angels or playing in the snow and I love the stillness in the neighborhood on a snowy night like we had last night.  If it’s going to be winter we might as well have snow on the ground and frozen ponds.  Unfortunately we’ve had almost no snow these past 2 years and only 1 week of ice thick enough to skate.

We finally got some snow yesterday so my kids asked me to build a small snow fort.  Never one to do things on a small scale I started building this structure.  It took about 4 hours and I didn’t finish until after 11:00pm but our front yard is now ready to withstand any invasion.  Tough to tell the scale but it’s over 4′ high and about 10′ across.  My kids couldn’t wait to go out and play this morning before school.  They want me to build a roof but I don’t think that will happen since we’re supposed to have a warm up this weekend.  Oh well, at least they’ll get a few days of fun before it all goes away.

Mortgage Insurance Tax Deductible for 2012 and 2013

Mortgage Interest DeductionMortgage insurance is once again a tax-deductible expense for eligible US homeowners.

As part of this year’s “Fiscal Cliff” negotiations, Washington passed the American Taxpayer Relief Act of 2012.  Part of that act re-instated the tax deductibility of mortgage insurance premiums which was eliminated in 2011.  The law covers the fiscal years of 2012 and 2013, which makes it retroactively available for 2012 tax filings even though the original mortgage insurance tax deductibility rules expired more than 12 months ago.

The American Taxpayer Relief Act of 2012 makes it possible for borrowers with itemized federal tax returns and an annual adjusted gross income of less than $100,000 to deduct 100% of their annual mortgage insurance premiums on the federal income tax filings.  For borrowers with an adjusted gross income of more than $100,000 per year, deductions are still available, but they phase-out as income levels rise.

Mortgage insurance of all types are eligible for deductions. This includes conventional private mortgage insurance (PMI) from mortgage insurers such as Radian, MGIC and United Guaranty. It also includes mortgage insurance premiums (MIP) due to the FHA and USDA.  VA mortgages do not require mortgage insurance.