Extension/expansion of home buyer tax credit

Major news outlets reporting that an agreement has been reached regarding the extension of the first-time home buyer tax credit, originally due to expire at the end of next month.  Vote expected this week or next.  Click here for details.

Pay now, save later?

John and Fred both have mortgages.  For comparison purposes, all terms are the same ($250,000 30-year term at 6.75% fixed).  Both have the same “required” monthly payment of $1621.50.   But at the end of year 25, John owes the bank $0 and Fred still owes over $82,300. How is this possible?

John has chosen to make his $1621.50 per month mortgage payment on a bi-weekly basis.  So, instead of making 12 payments of $1621.50, he is making 26 payments (52 weeks divided by 2) of $810.75.   Keep in mind, this is different from making 2 payments per month (only 24 – or “semi-monthly” – payments), so it gives him the added benefit of the equivalent of roughly an extra monthly payment each year (without feeling the financial pinch of doing so all at once).  Better yet, that “extra payment” should be applied directly to principal.

This works because the amount of each payment credited towards principal gets credited faster; therefore, the principal balance upon which interest accrues decreases at a faster rate.  So, the bottom line is the amount of interest John will pay is reduced and his mortgage is paid off faster.

• At the end of year 5, John owes $225,114; Fred still owes $234,690.
• End of year 10:  Johns owes $189,314; Fred owes $213,254.
• End of year 15:  John owes $140,185; Fred owes $183,240.
• End of year 20:  John owes $71,247 versus Fred who owes $141,219.

Over the life of his loan, John will pay roughly $253,343 in interest; Fred will pay about $333,753 (an interest savings for John of $80,400).   Even if John doesn’t keep the house for 30 years, he is building equity faster along the way.  So, if he sells the house before the 30 years, he will have a lower mortgage balance to payoff from his proceeds, which could leave him more money for the down payment on a new house.

Not all lenders accept bi-weekly plans, so be sure to check with yours.  You also want to make sure that they automatically apply extra payments towards principal first.  Be sure that your loan does not have a pre-payment penalty associated with it.  Finally, be aware that most lenders or bi-weekly payment programs will require that the payments be auto-drafted from your checking or savings account.

Some lenders offer bi-weekly payment programs for free and others charge for the option.  There are also stand-alone pre-payment programs out there, but as with anything financial in nature, make sure you do your homework to avoid scams, or, use a program that is referred to you by a trusted source.

Disclaimer:  Always consult your trusted tax, investment, legal, real estate, and/or mortgage advisor to discuss your specific situation, as every individual’s scenario is unique.  Excerpts from this blog are for general informational purposes only and should not be construed as specific advice.

Today’s mortgage reality: Documentation

By now, you’ve surely heard that there have been many changes in the mortgage industry over the past couple of years.  What this means to you as a borrower is that your lender will likely require documentation to support your income, assets, and verification of your identity, at the very least.  Also, new federal rules have heightened the documentation requirements for most, if not all, loan programs.

The “typical” documentation required for all borrowers party to the loan includes:

• Copies of the most recent 30 days paystubs; or, if self-employed, the past 2 years’ business and personal tax returns;
• Copies of W2s or 1099s for the past 2 years;
• Copies of the most recent 2 months’ asset account statements (such as checking, savings, retirement, money market, CDs, stocks, or other accounts).  When supplying bank statements, copies or PDFs of the actual statements are best.  If Internet transaction printouts are used instead, they MUST be stamped and signed by the financial institution for fraud-prevention purposes.  By the way, the same rule applies to paystubs.
• Lastly, you will need legible copies of your driver’s license and Social Security card (or other acceptable official identification, per Patriot Act requirements).  This also protects you from someone fraudulently using your name or identity with which to obtain a loan.

Speaking of the Patriot Act, something that sneaks up on many borrowers is the fact that large deposits must be source documented.  This does not include any direct-deposited payroll that can be verified by paystubs.  The primary reason for the source documentation is the Patriot Act, one of the functions of which is to make it more difficult to funnel illegal or terrorist funds.  Secondarily, large deposits must be verified to prove whether down payment funds are actually the borrower’s own funds, or if they are gift funds.  Some programs do require that the borrower use his/her own funds.  On the other hand, gifted funds are allowed under certain programs, but must follow a specific process and be documented accordingly.  Your lender can advise you about the specifics.

Keep in mind that the documentation I’ve suggested is a starting point.  In many cases, underwriters will require additional documentation, depending upon the loan program’s guidelines and your particular scenario.  But if you can have this documentation gathered and ready for your lender – and provide subsequently requested documentation in a timely manner – the borrowing process will definitely get started on the right foot.

Disclaimer:  Always consult your trusted tax, investment, legal, real estate, and/or mortgage advisor to discuss your specific situation, as every individual’s scenario is unique.  Excerpts from this blog are for general informational purposes only and should not be construed as specific advice.

Points? Taxes? What’s a borrower to do?

One of my trusted tax referral partners provided me with this valuable information last week.  I thought it worthwhile (and possibly worth hundreds of $$$!) to pass on here:

“Most savvy homeowners know that when they refinance the loan on their primary residence, the points generally must be amortized over the life of the loan for income tax purposes.   However, if that same individual refinances a second time, the balance of the points charged on the original refi become fully deductible in the year of the new loan.  For many, this additional deduction represents a considerable savings in tax dollars.  For home sellers that previously refinanced the original mortgage, they will potentially have a greater interest deduction in 2009. “

It is important to keep in mind that these are the “general” rules, and that there will always be exceptions, depending upon a tax-payer’s individual circumstances.  But the good news is that it’s not too late to amend tax returns for any eligible tax-payer who may have missed this opportunity in 2005, 2006 or 2007.  For more information, contact my referral partner via the form below and “Submit.”

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Disclaimer:  Always consult your trusted tax, investment, legal, real estate, and/or mortgage advisor to discuss your specific situation, as every individual’s scenario is unique.  Excerpts from this blog are for general informational purposes only and should not be construed as specific advice.

Time is running out for the first-time home buyer tax credit!

If you are a first-time home buyer and you intend to take advantage of the tax credit offered courtesy of the American Recovery and Reinvestment Act of 2009, the clock is ticking!

So, here’s what you need to know in a nutshell:

• Under the current legislation, the credit is available to first-time home buyers only.  For the purposes of this program, a “first-time home buyer” is defined as “someone who has not owned a principal residence during the three-year period prior to the purchase.”
• Not all first-time home buyers will qualify to take advantage of the tax credit; however, based on the typical first-time buyer demographics, most will, as the full-tax credit is available to single taxpayers whose incomes are up to $75,000 (double that for married taxpayers).
• The most recent incarnation of the tax credit is available for homes purchased after January 1, 2009 and before December 1, 2009.
• Contrary to popular belief, the tax credit is not a flat $8,000 in all cases.  The amount of the credit is actually equal to 10% of the purchase price (up to a maximum of $8,000).
• The tax credit does NOT have to be repaid (unless the home ceases to be the taxpayer’s principal residence within 3 years after purchase).
• The credit equates to a dollar-for-dollar reduction of the buyer’s tax bill and will be paid to eligible taxpayers (even if they owe no tax).
• The credit may NOT be claimed prior to the closing date.  There have already been some reports of fraud in this area on the part of buyers, mortgage professionals and even CPAs, so if yours recommends an “alternative strategy,” be careful!  The last thing you want to do is unwittingly commit tax fraud.

With other new legislation affecting appraisals and Truth in Lending disclosures, closings are taking longer.  So, if you want to close on your purchase by November 30th to take advantage of this tax credit, it is imperative that you get pre-approved for a mortgage and get that purchase contract written now!

Always consult your tax professional for information affecting your income taxes.  For more information on the tax credit, visit http://www.irs.gov.

Disclaimer:  Always consult your trusted tax, investment, legal, real estate, and/or mortgage advisor to discuss your specific situation, as every individual’s scenario is unique.  Excerpts from this blog are for general informational purposes only and should not be construed as specific advice.