The Mortgage Debt Relief Act of 2007 is set to expire year end 2012!
Prior to this act, mortgage debt reduced through short sale, foreclosure, restructuring was considered taxable per IRS. This Act allows taxpayers to exclude this income as taxable income on their tax returns since it resulted from the discharge of debt on their principal residence. Please take this into consideration if you are contemplating a short sale or any other type of restructuring as you may want to complete this prior to year end.
Example: You borrow $300,000 and default on a $100,000 through a short sale and were only able to pay the lender back $200,000. This $100,000 cancellation of debt is generally taxable and could result in owing the IRS $25,000 plus or minus depending on tax bracket.
Is Cancellation of Debt income always taxable?
There are some exclusions such as Bankruptcy, Insolvency, Certain Farm Debts, Non-recourse loans and Qualified Principal Residence Indebtedness. The rules involved in these exclusions are complex.
It is recommended that taxpayers who believe they may qualify for one of the exceptions seek the assistance of a tax professional. If you do not know one, I would be happy to make a recommendation.
Many homeowners out there wonder if they should use the extra cash they have to pre-pay their mortgage. When you pre-pay your mortgage, you end up paying less interest in the long run, but there are things to think about before going through with this.
REMBMER:
A Mortgage is a loan against your income. If you do not have an income, it is nearly impossible to obtain a mortgage and access the equity in your home should an unexpected emergency arise. Don’t put yourself in a situation where you would be forced to sell your home if you needed to access funds. It is much easier to sell a liquid investment for the amount you need vs. the entire home.
Home equity accumulates in four ways: the money committed in the original down-payment, any appreciation in the local housing market over time, physical improvements or renovations and, of course, principal payments on the mortgage itself.
While seemingly desirable at first look, this accumulation of wealth in the home has some consequences that you should keep in mind. First, the cash in your home is virtually buried and inaccessible. Not only is it unavailable in the event of a family emergency, it is vulnerable to loss due to periodic downturns in housing values, unfortunate circumstances like fires, or natural disasters such as hurricanes (insurance may not cover the full market value of your home). Also, year after year the money that is essentially trapped in your property is earning zero interest, unlike if you were investing that money elsewhere.
Putting more money into your house may build home equity, but it won’t be easy to get the money back quickly if needed. Essentially mortgage prepayment isn’t always the best choice if you are not properly diversified and have adequate cash reserves. Before you pre-pay or apply for a shorter term mortgage, please consult with your loan officer and financial advisor to determine what is the ideal course of action based on your asset allocation and future financial needs.
Bull Market in Bonds Nearing an End?
Mortgage rates have seen historic lows due to a long-running bull market in bonds. Specifically, mortgage backed securities. Demand has far exceeded supply which has driven down mortgage rates. As demand starts to pull back, mortgage rates will begin to move upward.
Say goodbye to the longest bull market for bonds in history. The market is at a turning point, say portfolio managers—some of whom are running the nation’s largest bond funds. The reason: growing worries about inflation . While it is not a problem right now, there are several strong economic factors that typically lead to higher prices down the road.
Rates are already starting to rise, even without the Fed. This week, Treasuries and Mortgage Backed Securities saw a sharp sell-off, bringing yields—which move opposite to prices—to their highest level since October.
Rising yields, when coupled with inflation, are a double-whammy to the value of bonds.
With job growth comes purchasing power and pricing pressure on businesses and consumers. Yigal Jhirad, portfolio manager for Cohen & Steers, thinks this pressure is already underway.
While significant inflation and higher mortgage rates are still far down the road, it is clear that they are on the horizon. This is actually a good thing for housing. The housing market has always performed better in the “sweet spot” of mortgage rates which is in that 5.50% to 7.00% range.
Quote of the week: “Inflation will be higher than they (Federal Reserve Policy Makers) think”
Mark, Zandi, Moody’s Analytics chief economist
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Job Claims, Factory Data Suggest Recovery Picking Up Steam:
Government reports on weekly jobless claims, manufacturing activity and inflation offered fresh evidence the U.S. economic recovery is picking up steam.
New U.S. claims for unemployment benefits dropped to a 3 1/2 year low last week, a government report showed on Thursday, suggesting the labor market recovery was gaining speed. Initial claims for state unemployment benefits dropped 19,000 to a seasonally adjusted 366,000, the Labor Department said. That was the lowest level since May 2008.
A gauge of manufacturing in New York State showed growth accelerated in December to its highest level since May as new orders improved, the New York Federal Reserve said in a report on Thursday. The survey of manufacturing plants in the state is one of the earliest monthly guideposts to U.S. factory conditions. The gain in December added on to improvement last month that pulled the index out of a five-month contraction.
Wholesale prices rose a modest 0.3 percent last month, as companies paid more for such items as food and pharmaceuticals. But energy prices barely rose, keeping inflation in check.
Most economists say they think inflation has peaked and will slowly decline next year. That’s because prices for oil and many agricultural commodities have fallen from their highs this spring. Slower growth in China and a possible recession in Europe have reduced global demand for energy and other goods.
Lower price growth means consumers will have more buying power, potentially boosting consumer spending. The jump in gas and food prices earlier this year limited the ability of consumers to buy other goods, thereby slowing the economy.
Consumer spending rebounded in the July-September quarter as prices eased. The stronger spending helped increase growth to an annual rate of 2 percent from a slight 0.9 percent in the first half of the year. Economists expect consumer spending to rise again in the last three months of this year and think growth could top 3 percent. Federal Reserve policymakers, like many private economists, predict inflation will fall next year. That would give the central bank more latitude to hold down interest rates and potentially take other steps to stimulate the economy.
Tame inflation, improved manufacturing, increased consumer demand and super-low mortgage rates all add up to big positives for the housing market.
What Happened to Rates Last Week:
Mortgage backed securities (MBS) gained +67 basis points from last Friday to the prior Friday which moved mortgage rates lower. Once again, the U.S. saw much better than expected economic data.
Both the N.Y. Empire and Philly Fed manufacturing data saw big increases and the Initial Weekly Jobless Claims fell below 390K. We also saw very tame results in both the Consumer Price Index and the Producer Price Index which point to reduced inflationary pressure.
MBS rallied in the later part of the week on the heels of to very successful U.S. Treasury auctions. Both the 10 and 30 year auctions saw very strong demand which pushed rates lower.
This was due to a growing concern that the recent agreement out of the European Summit would not be enough to stem the tide in Europe. This concern caused investors to snap our bonds even though the interest rates and returns are very low. Foreign investors simply want a place to put their funds, knowing that they will get those funds back.
When you’re thinking of buying a home, you may wonder what your mortgage payment will look like. When you have a mortgage, you’ll have several different portions of your payment each month. Assuming your mortgage is not an interest-only loan, your monthly mortgage payment consists of principal, interest, taxes and insurance (often abbreviated as “PITI”), and sometimes it may include additional monthly obligations, such as private mortgage insurance and flood insurance if applicable.
In the beginning, mortgage payments primarily go toward paying off interest because the loan balance is so high. Over the years, as that balance decreases, more of the monthly mortgage payment goes toward principal each month until you eventually own the home outright. Here is a breakdown of your payments:
Principal is the money you borrowed to purchase the home; essentially it’s the amount of debt you are borrowing.
Interest is the cost of borrowing the money.
Taxes are paid by homeowners to local governments, and are usually a percentage of the assessed property value.
Insurance helps protect against financial loss from fire, natural disasters or other hazards. Most lenders require you to have a homeowner’s insurance policy on your home because it will help protect our investment as well as yours. Insurance will protect you from a number of dangers and provides liability coverage.
Remember, many loan quotes will only include your principal and interest. You’ll also need to factor in the taxes and insurance to calculate your total monthly mortgage payment. For a rough estimate of your monthly payment, or to compare what your payments would be with different terms of the loan, visit our company homepage and use our calculators and other online resources:
http://www.1stadvantagemortgage.com/stiefel/resources/amortization.php
When you’re ready to take the next step to buying your home, I’ll be happy to explain the process further.
A home appraisal is an independent opinion of your home’s value, performed by a licensed home appraiser. The Market Value is the estimated amount for which a property should exchange between and educated buyer and a reasonably motivated seller.
First, they acquire a base for your home’s value derived from the recent sales prices of homes that are comparable to yours in terms of bedrooms, bathrooms, style, and square footage. Then, accounting for features and amenities that make your home different, the appraiser applies “adjustments” to that base value.
This practice is called the “Sales Comparison” approach, which then results in your home’s appraised value. It’s the most common appraisal method used by lenders.
As a homeowner, you can’t affect the sales prices of your home’s comparable properties, but you can help your appraiser understand how your home stands apart from other homes. This, in turn, can impact your home’s adjustments, resulting in a higher appraised value.
Every valuation dollar can matter with home appraisals. Keeping that in mind, here are a few tips for maximizing your home’s appraised value:
• Make sure your home is clean. This can contribute to a higher overall condition adjustment.
• Mention any new roofing, flooring, HVAC, plumbing, or windows you’ve installed since purchase.
• Don’t mention projects or repairs you’re about to or thinking of starting. Appraisers don’t credit for unfinished projects and don’t need to know that information.
• Make minor household fixes prior to the appraisal, such as a running toilet, leaky sink, or peeling wallpaper and paint.
Lastly, schedule the appraisal for a time that is convenient for your entire household. An appraiser needs to view, measure, and take photos of every room in your home. If a room’s door is closed because of a resting child, for example, the appraiser may need to schedule a second appointment to complete the appraisal, and that can raise your appraisal costs. Be home for your appraisal so you can answer any questions the appraiser may have, making sure you have covered all ground to receive the best value for your home.
This week U.S. economic data returns, but markets will still be watching for Europe’s impact. Greece has dominated mortgage market headlines for the better part of 2011, and global investors remain concerned that problems in Greece may spill over into other European nations. We have actually benefitted from those growing concerns, as U.S. mortgage markets are looked at as “safe” compared to other security-types. Safe investments are in high demand during uncertain times, often improving in price.
Italy changed leadership over the weekend, partly to restore market confidence in its ability to get its debt under control. We should expect developments in Italy to influence U.S. mortgage rates this week. In addition, rates will respond to the various economic data reports also set for this week.
Today we saw the Producer Price Index ease down a bit and Retail Sales took quite a jump – this is typically good news for Wall Street, but it is still being trumped by the Euro zone worries mentioned above. Additionally, tomorrow brings the Consumer Price Index and Housing Price Index, while Thursday we will get reports on Housing Starts and Jobless Claims.
Mortgage rates remain near all-time lows, with not much room to go lower. If you’re shopping for a rate you may want to consider locking in. As Greece and Italy show signs of moving forward and the US economy finally gains traction, expect safe haven buying to regress and mortgage rates to rise.
As things continue to change in our industry, mortgage lending guidelines have been tightened, making it more and more difficult for some borrowers to obtain financing. Compared to even the last few years, many times it takes more assets, a higher income, and better credit scores to be approved for a mortgage. According to the Wall Street Journal, one in four mortgage applications were denied financing in 2010.
There are changes in this industry that we can’t help, but there are some steps that borrowers can take to ensure that they have a smooth application and borrower process. We witness a lot of mistakes that borrowers make; here are some of the common errors that many people make that should be avoided:
Changing jobs: One of the most important things lenders and underwriters want to see is a consistent income. It’s essential that you can prove income stability, as they believe that if they know where your next paycheck is coming from, you’ll be less likely to default on your loan. Don’t change jobs, become self-employed or quit a job altogether in the middle of the application or loan process. Each of these things can ruin your approval and lead to your loan being canceled.
Making large purchases: The most common mistake that many homebuyers make is making big purchases before they close, like buying a car or purchasing large household appliances. It’s important that borrowers don’t charge big ticket items during the loan process, as these items increase your debt-to-income ratio (DTI). Your DTI is the percentage of a consumer’s monthly gross income that goes towards paying debts. Be sure to postpone any major purchases.
Moving assets from one bank account to another: You’re going to need to provide bank statements for at least the last two months on your checking and savings accounts, money market accounts and other assets. Make sure not to transfer funds from one account to another, as transfers will show up as new deposits and could complicate the loan process. If a deposit does not fit your recent banking history, you may have to disclose the source of the funds for each new deposit and this can cause added headaches at a time you don’t need them. All of your funds will need to be documented, so make sure all transactions are clear and within the norm.
If you have any questions throughout the course of your financing, please contact me. It’s best to keep yourself educated on the process each step of the way to ensure a smooth closing.
The Federal Housing Finance Agency (FHFA) is working with President Obama to make it easier for at least 1 million underwater homeowners to refinance into lower-cost mortgages.
Regulators are revising the Home Affordable Refinance Program (HARP), in order to help more homeowners who are current on payments but don’t qualify for refinancing. About 11 million people are underwater and nearly 40% of them are paying rates above 6% – these changes would allow more homeowners to refinance to a lower rate.
Here are three ways these changes will help homeowners hoping to refinance:
• Decrease loan fees for borrowers who want to refinance
• Remove the cap on how much borrowers can owe – it will no longer matter how underwater a borrower is
• Reduce fees borrowers must pay for appraisals and transferring mortgage insurance
Again this program will benefit many homeowners, as long as they are current on their mortgage payments. Due to that last statement, many people in the industry are saying that though this is a positive step in the right direction, more work needs to be done to help more people, as these changes to HARP would have no benefit to those many families who have fallen behind on their payments.
So although there is still work to be done, these are welcomed changes, which will provide more availably to a program created to help millions of homeowners struggling in the wake of the housing meltdown. Making more borrowers eligible to refinance their mortgage by enhancing and making changes to this program should give a boost to consumer confidence and enable more home owners to take advantage of current great low rates.
According to the government’s press release, pricing considerations for the new HARP program will be released on or before November 15, 2011; and lenders are expected to be offering the program as of December 1, 2011. The end date for HARP has been extended until December 31, 2013.
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Growth in the U.S. economy picked up during the third quarter as the gross domestic product from July through September increased at a rate of 2.5%. Nearly double the Q2 reading, and well above the reading from Q1. This represents the fastest growth of 2011, and the largest increase in a year. While this is likely good news for stocks, it could have an affect on home loan rates as money moves out of bonds and into stocks.
