Did you know that you have to pay back the homebuyer tax credit if you claim it and then sell your house (or otherwise stop using it as your principal residence) within the next three years? I didn’t, but apparently that’s the case. Here’s the scoop straight from the IRS:

Q: When must I pay back the credit for the home I purchased in 2009?

A: Generally, there is no requirement to pay back the credit for a principal residence purchased in 2009. The obligation to repay the credit on a home purchased in 2009 arises only if the home ceases to be your principal residence within 36 months from the date of purchase. The full amount of the credit received becomes due on the return for the year the home ceased being your principal residence. (source)

Note that there are no exceptions for military personnel who are deployed and sell their home. If they move out during deployment but retain ownership, the deployment “may be” considered a temporary absence such that the home can technically remain their primary residence.

If you find yourself subject to the recapture provision, you are required to repay the credit in full as “additional tax” when you file your Federal income tax return for that year. See IRS Form 5405 for additional details.

Follow me on Twitter!

---
Related Articles at fivecentnickel.com:

» $8,000 Homebuyer Tax Credit
» Did Congress Make the Homebuyer Tax Credit Retroactive?
» $15,000 Homebuyer’s Tax Credit is Back on the Table
» $15,000 Homebuyer Tax Credit
» $15,000 Homebuyer Tax Credit Dropped from Stimulus Package
» Congress Extends $8000 Homebuyer Tax Credit, Adds New $6500 Credit
» $7500 First Time Homebuyer Tax Credit
» Refundable vs. Non-Refundable Income Tax Credits

Buying a house is probably the biggest purchase that most people will ever make. Given what’s at stake, you want to be sure you’re not buying a lemon. If you’re buying an existing home, a home inspection can save you from getting a house that needs costly repairs from either owner’s neglect or old age.

Even if you’re looking at new construction, however, you should hire an inspector to make sure everything was done correctly during the construction process. Don’t rely on the codes inspectors, as they’re often in a hurry and might miss something important. Paying for a home inspection is a small price to pay for peace of mind.

Finding a home inspector you can trust

I’m a big fan of calling around for recommendations as it’s hard to gauge a home inspector from an ad in the phone book or online. You can start by asking your realtor for recommendations and/or comments on home inspectors. Also check with any friends that have bought a house and find out how they liked their inspector.

I’m primarily interested in how thorough the inspector is and whether or not they’ll take the time to explain the results to me. If your friends are open, you might also consider asking them about the price. While you’re not necessarily looking at the lowest price, you don’t want to overpay for your home inspection and break your budget.

Home inspection prices vary according to region and building size. I’ve found that estimated costs in my area are typically $300-$450.

Ask questions

After you have a list of names, go ahead and call the inspectors. While making small talk, ask questions concerning the inspection and their qualifications. Any qualified professional will expect these types of questions and won’t be offended.

If you’re looking for solid questions to ask the potential home inspector, the Department of Housing and Urban Development has a nice resource. I found the questions helpful when calling.

• What does your inspection cover and how much does it cost?
• Are you specifically experienced in residential inspection?
• Do you maintain membership in a professional home inspector association?

Some states, such as North Carolina, have a license for home inspectors, but others don’t. If your state doesn’t have a license requirement, ask the home inspector if they’re a member of the American Society of Home Inspectors. Verify by check with the association yourself. It pays to be diligent.

Be there during the inspection

It’s always a good idea to be present during the inspection. That way the inspector can not only review the results, but they can also point out any particularly problematic areas. Just don’t get in the inspector’s way.

What does a typical home inspection include?

The standard home inspector’s report will cover the condition of the home’s heating system; central air conditioning system (temperature permitting); interior plumbing and electrical systems; the roof, attic and visible insulation; walls, ceilings, floors, windows and doors; the foundation, basement and structural components.

Source: American Society of Home Inspectors

Make the most of your time by taking notes and paying attention during the inspection. When you receive your report from the inspector, review anything that you don’t understand. You may not have the technical expertise, so take advantage of the fact that you’re paying them to help you.

Have you been through a home inspection?

If you’ve had a home inspected, how did it go? Was the inspector helpful? Did the inspector help you avoid a costly repair? Do you have any tips to share?

Follow me on Twitter!

---
Related Articles at fivecentnickel.com:

» Home Inspection Today
» Home Inspection Complete
» Final Walkthrough Today
» Buying a New Car, Part III
» Bought and Sold in Under Six Days
» The Cost of a Failed House Deal
» Q&A: Earnest Money
» Roadmap for a Successful Relocation

With the $8,000 first-time homeowner’s tax credit deadline approaching, many people are still trying to get in on the deal. If you’re in this boat, don’t assume that just having a down payment is enough (even though it’s a big help).

Applying for a mortgage involves a thorough check into your finances to see if you really qualify for a mortgage loan. This process takes time, and waiting to the last minute could cost you the tax credit.

Before you apply for a loan, you should be familiar with some numbers that the lender will be examining closely. The better you look to them, the better your chances of getting a solid deal on your mortgage.

Credit score

One of the first things that a lender will look at is your credit score. Not only does your credit score influence whether or not you’ll get approved, but it can also influence your mortgage rate. Be sure to check your credit report well in advance of any loan application, and fix any errors that you see.

Buyer’s income

Lender have to verify your income, so be prepared to provide W-2s, pay stubs, tax returns, and bank statements. If you’ve recently landed a new job, you might also be asked for a letter from your employer verifying your new salary. In our case, we were asked for two years of tax returns and recent financial statements.

Lenders are also looking to see if the savings you have is a gift or if you have saved up for it. Receiving a gift from a relative isn’t necessarily a bad thing, but you’ll need a mortgage gift letter to prove that it’s not a loan that has to be repaid. Prospective lenders just want to know the full extent of your obligations.

Debt-to-income ratio

Your debt-to-income ratio is a number that lenders use to evaluate the amount of debt that you’re carrying. It’s calculated by taking your debt monthly debt obligations and dividing that total by your monthly income.

Lenders are looking for lower numbers, as you’ll be more likely to be in a position to pay your mortgage. Lenders used to want your total debt obligation (including your housing expenses) to be no more than 28% of your income, though this number drifted up as high as 36% or even 40% during the housing boom.

Improving your debt-to-income ratio

There are two basic ways to improve your debt-to-income ratio:

Decrease your debt: Before you apply for a mortgage, reduce your long-term debt such as your car loan or student loan debts. You should also pay down your credit cards and negotiate lower interest rates, starting with any that are behind. If you are having a hard time now with debt, adding a mortgage will be a disaster. Reduce your monthly expenses and put that money towards reducing your debt.

Increase your income: Building additional income streams can help you immensely in the long run, and not just with getting a mortgage. If you have a review coming up at work, prepare diligently, and include concrete examples of your worth to the company. If they don’t want to give you a raise per se, see if you can negotiate a bonus if you reach a performance goal.

Loan-to-value ratio

This is another number for lenders to asses the risk of loaning you the mortgage loan. The loan-to-value (LTV) ratio is the mortgage loan amount divided by the appraised value of the property (expressed as a percentage). An independent appraiser usually determines the property’s value. If the buyer has a high loan to value ratio, they can expect to pay private mortgage insurance.

Private mortgage insurance (PMI) can add to your monthly payments so having a larger down payment or piggybacking your mortgage loan can lower your payments.

Cash Reserves

I read about this one in a few books covering mortgages, but I personally haven’t noticed this from our lender. Some lenders examine how much cash you have on hand to see if you’ll be able to weather any emergencies that arise. The cash reserves that we have are for the down payment as well as some for our emergency fund.

Closing thoughts

While it’s gotten harder to get a mortgage over the past year or so, that’s a good thing. It means that lenders are checking to make sure that borrowers can handle their mortgages. As much as I hate paperwork and filling out form after form (after form!), I also understand what’s at stake, and why the bank is being careful.

Have you noticed a change in mortgage standards?

Follow me on Twitter!

---
Related Articles at fivecentnickel.com:

» Qualifying for an ‘Economic Stimulus’ Tax Rebate Check
» Free Filing to Get Your Economic Stimulus Tax Rebate Check
» Economic Stimulus Tax Rebate Notification Received
» Haven’t Received Your Tax Stimulus Rebate Yet?
» What’s the Difference Between Tax Exemptions and Tax Deductions?
» Qualifying for an FHA Home Loan
» House Approves Tax Stimulus Package
» Tax Stimulus Rebate Payments to Start Early

This is a guest post from Kevin Mercadante of Out of Your Rut. Kevin is a former loan underwriter, and also author of Lighten Your Load, an e-book focused on reducing living expenses while still maintaining a comfortable lifestyle.

The housing market has been down for two years or more in much of the country, but many home buyers are continuing with the practice of buying a new home before selling the old one. While this was a common practice a few years ago in a stronger market, it makes little sense now.

Selling a house in this market is substantially more difficult than buying a new one.

If you insist on delaying the sale of your current home until you put a contract on a new one, then you’ll face the very real possibility of carrying house payments on two mortgaged properties at the same time. This is a situation that should be avoided at all costs in this market.

The downside of the real estate double deal

Below are some common entanglements you might face by not selling your house before buying a new one.

Qualifying for a new mortgage. A mortgage approval is much harder to obtain when the potential exists for carrying mortgages on two houses. Your lender will be aware of the situation, and may be less flexible in your terms. Either that, or they might not approve your loan at all. Since most buyers purchase at the upper range of affordability, the possibility of carrying two properties may be viewed as an unacceptable risk.

Sale of prior residence clause. If the lender wants you to sell your current home before closing on the new one, they will add this condition to your approval. Real estate agents don’t like it, and sellers like it even less. It makes the closing on your new home contingent on the sale of your old one —- a deal dependent on another deal. If your lender requires the sale of your current home, your offer on a new home may not be accepted.

The Simultaneous Close. This is typically the most desired outcome. You close on the old and new homes on the same day. This is the perfect world outcome, but much more difficult to pull off than most people think. It’s very stressful on all parties, and can be sabotaged by a laundry list of potential issues with EITHER transaction. This is the classic, “it ain’t over until it’s over” trap, that may cause sleepless nights and significant delays in closing.

Wiping out your liquid assets. There are numerous expenses that accompany the purchase of a new home that don’t show up on a closing statement. Costs of the move, new furniture, minor repairs to the new home and the “whoops, we didn’t know we would need to buy (or fix) that!” Now add an extra monthly mortgage payment to the mix, and how long do you think your liquid assets will hold out?

A forced rental situation. Renting out your old house to cancel the payment on it might make sense short term, but having tenants will make it much harder to eventually sell your house. Your tenant might not be open to real estate agents showing the house, and also might not keep it in salable condition.

Foreclosure. Carrying two mortgaged properties simultaneously is a major cause of foreclosure. Even if nothing goes wrong, the double payments might prove to be too much for you to handle.

Common reasons for not selling first

Over my many years in the mortgage industry, I’ve heard the following offered as reasons for buying the new house before selling the old one.

“My house is in (pick one) top condition/a top neighborhood/a top school district, so it’ll sell fast.” Most home sellers aren’t objective when assessing the salability of their homes, and tend to be overly optimistic. Note: seller optimism is not a factor in the marketability of your house.

“I don’t want to make a double move.” A double move is a temporary problem, and one you have some control over. It’s not uncommon to go a year or more carrying two house payments! That’s serious money.

“We might not be able to find another house quickly if we sell ours first.” For all the same reasons it’s difficult to sell a house in today’s market, it’s much easier to buy one.

“What if we sell our house, then can’t get a mortgage for one that we want to buy?’ You can and should obtain a mortgage pre-approval before entering into any home buying situation, so the risk here is remote at best.

The unspoken fear of being homeless. Okay, I’ve never actually heard this one, but I suspect that (perhaps in the dark of the night) people might have a pang of fear that selling their house before buying a new one could leave them out on the street. Given that you’ll have a loan pre-approval before doing anything anyway, this isn’t something to be feared — especially not in this market!

The alternatives

Simply getting a contract offer on your house isn’t always sufficient. Contracts can fall through for more reasons than you can imagine, as can the buyer’s mortgage approval. The cleanest way to enter the purchase of a new home is to fully dispose of the old one first. Below are some suggestions on how to accomplish this.

Before using any of these suggestions, it is strongly recommended that you first consult a qualified real estate attorney in your area as laws and practices vary by jurisdiction.

Sell your house with a delayed closing date. You can accept a contract on your current home and set the closing date 30, 45 or 60 days from receipt of a contingency-free mortgage approval from your buyer. At that point, you’ll have a solid buyer as well as time to find your new home, and you may be able to pull off the coveted simultaneous close.

Add a short-term rental provision to the contract on your current home. Add a clause to the sale of your old home that permits you to stay in the house as a rent-paying tenant for 30-60 days following the close. Use this time to secure your next home. You’ll avoid a double move, have the cash from closing in hand, and can make a clean offer on a new property.

Move into an extended stay hotel and put your furniture in storage. This requires a double move, but also eliminates the uncertainty pf being able to sell the old home. It also makes your a more attractive buyer. Yes, it will cost more, but it’s a solid defensive strategy that guarantees you won’t be stuck with two mortgages.

Sell your house, and take a lease purchase on a new home. This strategy also enables you to sell your old home and enter the market as an unencumbered buyer. You get a chance to “test drive” the new house and neighborhood, and you avoid the double move. There are now more lease purchases available than there have been in recent memory, and one might imagine that any property that’s been listed for sale for more than a few months might be a candidate for such an offer even if it’s not being presented as such by the sellers.

No doubt any of the above will create some problems, but you’ll be accepting smaller, short-term problems rather than risking larger, more costly problems later.

Do you know of anyone who’s been trapped with two homes for more than a couple of months? Are you in this position now?

Follow me on Twitter!

---
Related Articles at fivecentnickel.com:

» Weekly Roundup – 12/08/06
» Pre-Paying our Mortgage
» Avoid Costly Home Insurance Mistakes, Part 1
» Calculating Your Mortgage Refinance Payback Period
» What to do if you get a Second Economic Stimulus Check
» Natural Gas Prices Go Even Higher
» How to Pay Off Your Mortgage Early
» What’s a Piggyback Mortgage?

As many of you know, we’re in the process of buying a townhouse. We recently received the paperwork from our lender, including our truth in lending disclosure, a disclosure book, and our good faith estimate. The Real Estate Settlement Procedures Act (RESPA) requires that we receive these things within 3 business days of submitting our loan application.

As we get closer to closing, we’ll also receive a HUD-1 Settlement Statement, which is a form used in the United States for disclosure of fees that the lender or broker is charging. The purpose of the HUD-1 statement is to help borrowers understand the total costs of buying their home. These documents are a great resource to give you an idea of upcoming expenses and costs.

Always ask questions

I’ve heard from my friends and read from others that they wished they ad asked more questions when buying their home. Unfortunately, they usually come to this realization after they realize that they could’ve gotten a better loan. Instead of relying on what a lender tells you, check out these resources:

• HUD’s Site on Buying a Home and Closing Costs
• Consumer’s Guide to Mortgage Lock-Ins
• Consumer’s Guide to Mortgage Settlement Costs
• Five Tips for Shopping for a Mortgage
• Looking for the Best Mortgage: Shop, Compare, Negotiate

Remember, no broker or lender has to give you the best deal. They are trying to make a profit, and that might involve higher rates and/or fees than you would otherwise have to pay. Be sure to ask questions, and don’t be afraid to comparison shop. It’s your name on that loan, and you’ll be the one responsible for it.

Is your interest rate adjustable or fixed?

It’s in your best interest to understand the term of your loan, your interest rate, whether it is fixed or adjustable, and whether or not you will have any balloon payments in your future — you should generally avoid loans that require balloon payments.

Fixed-rate loans generally have repayment terms of 15, 20, or 30 years.

Adjustable-rate loans, also known as variable-rate loans, usually offer a lower initial interest rate than fixed-rate loans. The interest rate fluctuates over the life of the loan based on market conditions, but the loan agreement generally sets maximum and minimum rates.

Source: Federal Reserve

Run all your numbers before agreeing settling on a lender and loan. Ask them to walk you through and show you how much your monthly payments could be a year from now, five years from now, and so forth. In the case of a fixed-rate loan, the principal and interest payments won’t change over the life of the loan.

How much are your settlement costs?

Besides your down payment, there are a number of costs associated with closing on your new house. Becoming familiar with the typical costs and fees will put you in a better position.

Loan origination fees: Borrowers might be asked to pay this fee in return for the brokers/lenders handling your loan. It typically ranges from 1- 1.5% of the house’s cost, though some lenders offer lower flat rates.

Hazard/homeowners insurance premiums: Lenders expect you to pay your first year’s premiums in advance. Going forward, they will also (most likely) collect a portion of your annual premium along with your monthly mortgage payment and place it in your escrow account.

Title insurance: The title insurance come into play if there’s ever a dispute of who really owns the property. While you have to find a company that meets your lender’s requirements, you can search to find a good deal on your title insurance premiums.

Just make sure the coverage you get is adequate. Some cheaper policies may have exclusions that can hurt you — e.g., they might only protect the lender’s interests.

Pest inspection: Depending on where you live, your new home might need to be inspected prior to closing for termites and other pests that might damage your house.

Credit report: Lenders will pull your credit report to make sure you’re a financially worthy candidate. The cost for doing this is typically passed on to the borrower.

Other settlement costs: You also have to consider processing fee, underwriting fee, document review (I’m not kidding!), tax service fee, commitment fee, wire transfer fees, overnight shipping fees, and a few more. There are a lot of fees involved, so review your Good Faith Estimate carefully to see what you should expect.

Closing thoughts

If you’re thinking of purchasing a new home, keep the settlement costs in mind when formulating an offer. Remember, you’ll have to bring enough cash to the closing table for both your down payment and your settlement costs.

Your settlement statement will also give you a pretty good idea of your complete cost of home ownership. Of course, this doesn’t include incidentals like new furniture and your monthly utility bills, but it gives you a pretty good baseline.

And remember… If you have any questions about fees, ask before you sign anything. Don’t be afraid to negotiate a better deal — if something doesn’t make sense to you, try to get it reduced or removed. Being an informed buyer is the best course of action.

If you’ve bought a home, what surprised you about the settlement costs and/or the closing process? Do you have any tips or tricks? Anything that we should be sure to do/avoid? Please share your thoughts in the comments.

Follow me on Twitter!

---
Related Articles at fivecentnickel.com:

» Time Warner Cable Settlement
» Zurich Direct Class Action Settlement Finally Arrived
» Save Money on Life Insurance by Paying Annually
» Zurich Direct Life Insurance Class Action Lawsuit
» The Middle-Class Millionaire: Questions for the Author?
» My Best and Worst Money Moves
» Carnivals – Week of 02/06/06
» Opening a Bank of America Home Equity Line of Credit

I recently received an e-mail from a reader who is interested in paying off her mortgage early. In it, she asked the following:

Is it better to pay money monthly that is applied to your escrow or your principal? I would like to pay the equivalent of one extra mortgage payment a year, but I’m not sure where to apply it.

The short answer is that you want the extra payments to apply to your mortgage principal — that’s the amount that you still owe the lender. In most cases, your lender will automatically apply any overage to your mortgage principal. That’s not always the case, however, so it’s best to check with them to be sure.

The longer answer is that your monthly mortgage payment likely consists of four parts: principal, interest, taxes, and insurance. This is where the acronym PITI comes from. The reason that your lender collects taxes and insurance is that they want to protect their investment (your home) from both disaster and tax complications by making 100% sure that both bills get paid.

What the heck is escrow?

So where does escrow come in? Well… The term escrow refers to a legal arrangement in which a third-party takes possession of money or property until certain obligations have been met. In the real estate world, the “extra” funds that your lender collects are placed in an escrow account until your tax and/or insurance bills come due. At that point, the funds are disbursed to cover your obligations.

More generally, escrow services are often used to reduce risk in business deals when the two parties don’t fully trust each other. For example, if a particularly valuable asset is being sold, the buyer will often transfer their money to an escrow agent instead of paying the seller directly. The escrow agent will then hold the funds until the asset has been transferred, at which point the seller will get paid.

Follow me on Twitter!

---
Related Articles at fivecentnickel.com:

» How to Decide When to Refinance Your Mortgage
» Calculating Your Mortgage Refinance Payback Period
» Refinancing Our Mortgage
» Reaching the Mortgage Crossover Point
» Pay Down Your Mortgage With ‘Found’ Money
» Mortgage Refinance Complete
» Mortgage Fees: What’s Legit and What Isn’t
» What’s a Piggyback Mortgage?

We’ve been busy shopping around for home insurance for the condo that we’re buying. I’ve contacted several agents by phone and e-mail looking for a good deal. I’ve successfully reduced our car insurance bill by half simply by checking with different companies, so I know this will be worth the effort.

Why do you need homeowner’s insurance for a condo?

Homeowner’s insurance provides protection in the event of a loss such as a fire or burglary. You are most likely required to have it if you’re carrying a mortgage, as your lender will want the property protected.

Even if your lender recommends a company, you’re free to shop around as long as you meet their minimum requirements for insurance coverage. In addition to property protection, you’ll also get some level of liability protection that covers claims from people injured while on your property.

Your cost will vary based on the amount of coverage you sign up for and the amount of your deductible. We decided to look at a $500 deductible for now, which means we’re responsible for the first $500 of any claim.

What special about homeowner’s insurance for a condo?

I found out quickly that condo insurance is cheaper than home insurance. This is because your homeowner’s association will pay for the common areas in case of damage. Any additional coverage depends on the home association rules. To be honest, I found it difficult to quickly scan and find the answer in our HOA manual, so I called them instead.

While some associations do pay for the exterior of the structure, ours only pays for the common areas. MSN ran a story about condominium insurance and an insurance agent explaining how structural coverage can vary depending on your HOA’s “master” policy:

• Bare walls in. These policies cover all real property from the exterior framing inward but do not cover fixtures or installations within a condo unit. Features such as counter tops, bathroom and kitchen fixtures, and flooring are not covered. If your condo association has this kind of master policy, you’ll probably have a greater need for individual coverage…
• All in. These policies cover fixtures, installations or additions within the interior surfaces of the perimeter walls, floors and ceilings of individual units. Condo owners under an all-in plan will probably have a more limited need for individual coverage…

Check with your HOA to get an idea of what type of coverage you need.

Contact Information for Insurance Companies

Bankrate offers an online insurance quote form on its site. While it asks you some questions on discounts and coverage, you might want to call some companies directly to speak with an agent.

• Liberty Mutual: 1-800-837-5254
• Nationwide: 1-877-669-6877
• Ameriprise: 1-888-239-9953 (Costco Members get a discount)
• State Farm: The company encourages you to find a local agent to get a quote.
• Farmer’s Insurance: 1-800-FARMERS
• Allstate: 1-866-726-2814
• Geico: 1-800-841-2964
• Progressive: 1-800-PROGRESSIVE

When calling or e-mailing for a quote, be prepared to ask for discounts. Some things that may lower your premiums include:

• Smoke detectors
• Alarm system
• Distance to the nearest fire station (closer = better)
• Distance to nearest fire hydrant
• Fire extinguishers (believe it or not, we got one as a gift!)

Also check to see if you can qualify for an alumni discount, as Pinyo from Moolanomy receives one from his insurance company.Finally, if you have other policies with the same carrier (such as car insurance), check on the availability of a multi-policy discount (via CentsibleLife).

Your take

Who do you have insurance with? Are you happy with your coverage, rates, and/or service? What discounts have you received on your home insurance? Do you have any other tips?

Follow me on Twitter!

---
Related Articles at fivecentnickel.com:

» Help a Reader: Upside Down on a Condo
» One Year Ago This Week (August 27th – September 2nd)
» How to Save Money on Homeowners Insurance
» Buying Term Life Insurance, Part V (Epilogue)
» Buying Term Life Insurance, Part IV
» Online Shopping Poll Results
» Weekly Roundup – 09/29/06
» Buying Term Life Insurance

This past weekend my husband and I decided which townhouse we want to buy. After working the numbers, looking at different properties, and going through the options, we’ve signed a purchasing agreement on a property at a new development.

Since this is our first time buying a home, we wanted to be as thorough as possible. After all, this is a huge commitment. I wanted to share some of our thought processes for why we chose this particular place.

Deciding on our price range

We wanted to be conservative with the mortgage, so even though we were approved for more, we only looked at properties costing no more than 2.5x our annual income. Since there are guarantees in life, we wanted to be sure our mortgage bill won’t turn into a huge financial burden.

The total amount of the mortgage for the townhouse we chose is approximately twice our annual income. We decided to go with the lower number because we wanted a mortgage that we could afford, leaving some wiggle room for other bills.

Besides the mortgage, we knew we had to look at the other expenses related to owning a place. We started with a spreadsheet template, modified it a bit, and then used it to compare our options.

Home buying costs beyond the mortgage

Property Tax: To get an idea of what our property taxes would look like, I decided to look up the public tax records of homes that were comparable to what we were considering. Our city has the data on their website, so it only took 10-15 minutes to look everything up.

Private Mortgage Insurance: Since our down payment is going to be 10%, we’re going to have to pay PMI. This allows us to purchase the place without 20% down by protecting our lender in the event of a default. When we receive our $8,000 first time homeowner’s buyers tax credit, it’ll go towards our mortgage principal.

Homeowner Association Fees: While hunting for possible homes, we kept tabs on how much the homeowner association fees were and what they covered. We noted that most association fees covered trash and sewage. Some, but not all, also included landscaping. One townhome condominium complex didn’t include landscaping, and the agent commented that they hoped people would pay an additional fee for the maintenance crew to do the yard work.

One advantage we had was the fact that our friends lived in a development by the same builder and had the same homeowner association company managing it. Thus, we knew what we were getting into. I also checked out some of the HOA bylaws and asked them questions about how they operated. I’ve heard some horror stories about HOAs, and I want to avoid that sort of mess.

Our Place

After looking at the spreadsheet, we narrowed our options and decided on one specific home. We had a back up in mind, but fortunately the numbers fell in line for the place we wanted. After factoring in the extra costs of home ownshership, this new place should be well within our budget.

Your Thoughts

We still have a ways to go before we buy and move into our home. We’re hoping that it goes smoothly, but we’ll try to roll with any punches. I’d love to hear your thoughts and stories with the home buying process. Do you have any tips to share? Do you have any regrets? What should we look out for?

Follow me on Twitter!

---
Related Articles at fivecentnickel.com:

» Index Mutual Funds vs. Exchange Traded Funds (ETFs)
» The Ins and Outs of Bridge Loans
» Questions to Ask About Your Settlement Statement
» links for 2007-01-28
» Converting Paper Savings Bonds to Electronic Form With SmartExchange
» Qualifying for an FHA Home Loan
» More About Real Estate Investing
» Buying Life Insurance (Again)

A reader named Mary recently wrote in to ask about my thoughts on getting a mortgage from ING Direct. She’s heard that they have competitive rates and low fees, and is seriously thinking about refinancing her mortgage with them.

I don’t have any firsthand knowledge of ING Direct mortgages, but I was curious enough to go take a look. For starters, it doesn’t look like ING Direct offers traditional, fixed-rate mortgages. Instead, they offer a so-called “Easy Orange” mortgage as well as standard 5/1 and 7/1 adjustable rate mortgages (ARMs).

Inside the “Easy Orange” mortgage

The “Easy Orange” mortgage is a five year, fixed rate loan with monthly payments based on a 30 year payback period. Instead of making monthly payments, however, you make biweekly payments corresponding to half the monthly amount. This accelerates the repayment schedule, and helps you pay off your mortgage early.

At the end of five years, you can re-lock at the then-current rate for another five years. The downside here is that re-locking appears to cost the equivalent of two biweekly payments. The upfront lender costs are all wrapped up into $395 processing fee when you sign your original loan documents.

Inside the “Orange Mortgage”

The “Orange Mortgage” is an ARM that comes in two flavors — 5/1 or 7/1. In other words, the rates are initially fixed for five or seven years, after which time they adjust annually. As above, these loans are amortized over 30 years, and the total lender costs are wrapped up into a $395 processing fee.

Thoughts on ING Direct mortgages

Personally, I’m not crazy about ARMs. Instead, we’ve always used 15 or 30 year fixed-rate mortgages. While I’m aware of the arguments in favor of ARMs, I don’t like the uncertainty associated with them. This is especially true when rates are as low as they have been in recent years.

Speaking of rates, the Easy Orange loan had a 4.25% rate and the 5/1 and 7/1 ARMs were at 4.5% and 4.75%, respectively*. I just checked around, and these rates appear to be fairly competitive. Note, however, that these rates require a 75% loan-to-value (LTV) ratio or less. Thus, you’ll need to come up with a 25% down payment (or have at least 25% equity in the case of a refinance).

As I said above, I don’t have any firsthand experience with mortgages from ING Direct. This is where you come in… If you’ve ever borrowed from ING Direct, please weigh in. Likewise, if you’ve considered using them in the past, but decided against it, I’d like to hear why.

*Note: Rates as of 8/10/09.

Follow me on Twitter!

---
Related Articles at fivecentnickel.com:

» 40 Year Mortgages Going Mainstream
» More Online Financial Calculators
» Got any ING Direct Referrals?
» Emigrant’s Dirty Little Secret
» Escape Your Mortgage Due to a Bank Failure?
» From the Archives (June 1st – June 7th)
» 4% Mortgages Just Around the Corner?
» Emigrant Direct’s Online Incompetence

This is a guest post form Carson Brackney of Personal Finance Analyst. If you like what you see here, please consider subscribing to their RSS feed.

There’s always someone trying to find a silver lining when the skies are gloomy and gray. So it is with home foreclosures. Amidst all of the hand-wringing and sad tales of people who have lost their homes, there are those who see half-full glasses sitting on the counters of empty houses.

Some say that it’s time to buy these foreclosures. After all, properties that have been foreclosed upon are often sold by banks for a fraction of their full value. With the real estate market somewhere near its probable bottom, this is a good time to stock up on investment properties at a cut rate.

It’s enough to get a would-be real estate tycoon excited. And it does. Encouraged by those who advocating foreclosure purchases (and who are often selling guides or putting on seminars to teach you how), many novice players in the real estate field are gambling on bank-owned homes.

Is buying a foreclosure a good idea?

In some cases, it probably is a good idea to buy foreclosed properties. There are amazing bargains during a market downturn like the one we’re currently experiencing and there’s a strong probability that some of these cheap buys will turn into high-margin moneymakers for their owners within a year or two.

Those success stories, however, will be tempered with some very disturbing tales of woe. Buying a foreclosed home comes with a special set of risks and may not be an appropriate investment for those with little or no experience in the field.

Maintenance nightmares

There’s the question of upkeep, of course. This is a serious issue with foreclosure properties on multiple levels. First, by the very nature of the situation, you’re dealing with a property that was maintained by someone who was unable to make mortgage payments. It’s not a stretch to imagine that maintenance concerns weren’t addressed when the owner wasn’t able to make his or her payments.

Second, the banks who hold foreclosed property don’t have that old “pride in ownership” thing working for them. Banks are property managers and they often allow foreclosure properties to slip in terms of care and maintenance. By the time a home is “up to snuff” it may no longer be a bargain.

The ugly economy that has contributed to the rash of foreclosures we’ve seen adds another risk to the purchase process. Many homes are partially or completely gutted by owners during the foreclosure process in order to raise money.

There are homes in which floors have been completely removed, cabinets have been torn from the walls, and even kitchen sinks have been yanked out and sold. These owner-gutted properties often don’t turn out to be a great bargain after the new owners handle necessary renovation and repair.

Foreclosed homes are generally sold “as is”, meaning that the buyer assumes a great deal of risk in the transaction. An example of this is the story of a couple who bought a foreclosure only to discover that it had a serious mold problem. A lawsuit ensued, and this foray into foreclosure-land failed to turn into a profitable investment.

Look before you leap

If you’re a newcomer to the world of foreclosures, you might want to think twice before jumping in. If you’re convinced that you can find that perfect investment property, however, enter the arena with the right plan. Be careful, demand a full inspection prior to escrow, and consult with realty professionals who’ll help you to mitigate your risks.

It’s wonderful that some people will find that half-full glass on the kitchen counter of a foreclosure property. Unfortunately, too many buyers will learn that the kitchen counters, and maybe even the pipes beneath them, have been ripped out.

Follow me on Twitter!

---
Related Articles at fivecentnickel.com:

» Buying a Foreclosed Home
» The Foreclosure Crisis: Location, Location, Location
» Weekend Roundup – Countdown to Vacation Edition
» The Foreclosure Crisis, Revisited
» Buying a New Car, Part III
» What is ‘Shorting’ a Stock?
» One Year Ago This Week (September 17th – September 23rd)
» Buying Life Insurace (Again), Update #2

One goal that my husband and I have is to own a house. This hasn’t been a spur of the moment decision. We’ve been planning it for awhile, and have been working together toward our goal one step at time.

The decision of whether or not to buy a condo, townhouse, or house can be overwhelming. Today I want to take a look at how to break down a potential home purchase and examine the effects of your decision on you and your family.

Renting is a waste of money

You might feel pressure from others to buy a home as soon as possible. After all, “If you rent, you’re just throwing your money away.”

While I’m sure that people have good intentions when they say such things, it’s still a huge generalization that doesn’t take into account your individual circumstances. If you’re in an area where renting is much cheaper than owning, then you might be better served by renting.

If you’re not sure if that’s the case for you, run the numbers on the this calculator from the NY Times. This can give you an idea of how long it would take to break even if you buy vs. rent a home in your area.

Another thing to keep in mind is that renting is a great way to try out a new living arrangement without (literally) mortgaging your future on a relative unknown.

Opportunity cost

Homeowners pay an opportunity cost in the form of all the other things they could be doing with their money if they were renting a cheaper place. When people buy a home, it’s often larger than their previous rental, and generally more expensive. Besides paying the mortgage, you have to add the cost of taxes, home insurance, and possibly home association dues.

It’s also important to keep in mind that any extra money you spend on your mortgage, homeowner’s insurance, property taxes, and maintenance is money you can’t set aside to invest. Can you afford to pay a mortgage and still invest? If not, you may want to continue renting until your finances are stronger.

While you might be tempted by all the “good deals” produced by the current housing slowdown, you still might not be able to afford the long-term costs of owning a home. How much can a house end up costing you? Yahoo! Finance had an article by David Crook where he ran the numbers on home ownership costs:

You can easily end up spending three times the purchase price of a house. Today’s buyer of a typical $300,000 single-family home who takes out a 30-year loan will end up paying the price of the house again just in interest.

Add 30 years of property taxes, homeowner’s insurance, regular maintenance and a couple of big-ticket repairs or improvements, and the total cost of buying the home could easily top out at well over $1 million.

You’re pre-approved for a mortgage of $XXX,XXX

Just because your bank tells you something doesn’t mean it’s in your best interest to listen to them. We’ve been pre-approved for a much higher amount than we’re looking to spend. We’ve given our realtor a target price range around 65-70% of the amount the bank will give us. We want to continue to live below of our means, and we’d love to be able to afford a place with one income.

Instead of taking whatever they offer, get a mortgage that you can afford. Don’t just rely on what a bank or a mortgage broker tells you, as they’re often a bit aggressive with the numbers. My advice is to be conservative, and keep your mortgage payment below 25% of your net monthly income. This gives you a bit more wiggle room, as you also have to pay insurance, taxes, and maintenance with a house.

Take advantage of the $8,000 tax credit

If you can afford a home, the $8,000 tax credit for first-time homebuyers is a great incentive. In case you’re not familiar with this credit, you have to make your purchase between January 1st, 2009 and before November 30th, 2009 and you have to stay in your home for three years.

This is a refundable tax credit, and it’s phased out for individuals with AGI of $75k or higher or couples with AGI of $150k or higher. Here’s some info on how to claim it. Just be sure to look before you leap… Are you willing to spend $232,100 (the median price of new homes) just to get an extra $8,000 back form the IRS? We’re not, and I hope you aren’t, either.

Be willing to wait

We’ve decided that if none of the homes in our price range meet our criteria, then we’ll wait a bit longer and build up a larger down payment. When we do end up buying a house, we plan on staying there for a long time. Thus, it’s important for us to make a smart decision.

One of the big reasons that we rented a cheaper apartment was to be able to save some cash. We pay about $150/month less than our friends, which gives us some money to save with. We’re living below our means, and slowly building our savings.

Your thoughts

Do you rent or own a home? What factors did you consider when deciding whether or not to buy? Are you happy with your decision? What (if anything) would you have done differently if you could do it over again?

Follow me on Twitter!

---
Related Articles at fivecentnickel.com:

» The Three Worst Reasons to Buy a House
» Real Estate Sign of the Times
» Ten Real Estate Mistakes, Part 1
» One Year Ago This Week (July 2nd – July 8th)
» From the Archives – (March 16th – March 22nd)
» More About Real Estate Investing
» Rent vs. Own Poll Results
» Ten Real Estate Mistakes, Part 2

Remember back in February when I first talked about the $15,000 homebuyer tax credit? Well… It seems that Senator Johnny Isakson (R-GA), the original sponsor of that bill, is back at it again.

In addition to increasing the maximum tax credit from $8,000 to $15,000 (with a max of 10% of the home’s purchase), Isakson’s proposal would also make the credit available to all purchasers of a primary residence, not just first-time homebuyers. The income caps ($75k for individuals, $150k for couples) would also be eliminated.

As a former Realtor himself, Isakson has argued that “we don’t have a recession in first-time home buyers. We have a recession in the move-up market.” Thus, he believes that it’s time to expand the credit beyond just first-time homebuyers.

Interestingly, Isakson’s bill is backed by a bipartisan group of co-sponsors, including Lamar Alexander (R-TN), Jim Bunning (R-KY), Chris Dodd (D-CT), John Ensign (R-NV), Joe Lieberman (I-CT), Lisa Murkowski (R-AK), James Risch (R-ID), and David Vitter (R-LA). Not surprisingly, he has also picked up endorsements from a couple of real estate industry groups.

While I suspect that this program would actually work from the standpoint of getting people to buy/sell houses, at least in the short term, I’m not a big fan of throwing another $32B at the problem. What do you think?

Follow me on Twitter!

---
Related Articles at fivecentnickel.com:

» $15,000 Homebuyer Tax Credit Dropped from Stimulus Package
» $15,000 Homebuyer Tax Credit
» $8,000 Homebuyer Tax Credit
» 2006 Federal Tax Rates
» Refundable vs. Non-Refundable Income Tax Credits
» $7500 First Time Homebuyer Tax Credit
» 2008 IRA Contribution Limits
» 2009 Traditional and Roth IRA Contribution Limits

In what is rapidly becoming an annual rite of passage, I just appealed our property tax assessment. For those that aren’t aware, I did this a year ago in response to an unreasonable jump in the “value” of our house following a renovation, and we got a quick reduction in our assessment.

This time around, the slow real estate market resulted in a year-over-year decrease of about 4%. While any little bit helps when it comes to property taxes, this decrease was considerably less than for other homes on our street. Curious as to why that was, I decided to look closer.

In reviewing the change, I think I might have discovered the culprit… The county seems to think that our house is significantly larger than it really is. Even after accounting for the addition (completed in late 2007), the supposed square footage of our house somehow increased by another 400 sq. ft. during the past year.

Last night, I drafted a letter to the County Board of Tax Assessors outlining our case. Assuming that things proceed like they did last year, we should have a response within about a week. If we’re not happy at that point, we have the option of appearing before the Board of Equalization. Hopefully it won’t come to that.

Follow me on Twitter!

---
Related Articles at fivecentnickel.com:

» Appealing Our Property Tax Re-Assessment (Followup)
» Appealing Our Property Tax Re-Assessment
» Carnivals – Week of 06/02/08
» Carnivals – Week of 04/28/08
» Carnivals – Week of 05/19/08
» Home Renovation Progress (and Property Tax Assessment)
» Don’t Tax, But Still Spend
» Property Taxes on my Mind

About a month ago, we had a pretty lively discussion about whether or not you should pay off your mortgage early. A number of readers made great points on both sides of the debate. Since that time, I put together some thoughts on how to pay off your mortgage early for those that are interested in doing so. Today, I wanted to share some thoughts additional thoughts on the topic.

The source for these thoughts is a recent book called “The Frugal Millionaires,” which profiles 70 anonymous millionaires and their thoughts about money. Interestingly, just like with our prior discussion here on FCN, there are ‘frugal millionaires’ on both sides of the fence. Here’s a taste of what they had to say…

Thoughts in favor of keeping your mortgage…

“When it comes to residences, mortgages can be a way for someone to save cash for investing and therefore possibly allow them to earn a higher rate of investment return than one is paying in mortgage interest.”

“If you can have money at a cheap rate then a mortgage is a great decision…”

“If the money is cheap, it can be smart to arbitrage the cost of the mortgage vs. the benefits of a tax deduction and market gains…”

“The US government tax system is set up to reward those who have mortgages…”

“If the government is going to pay you to own a home, why turn them down…”

Thoughts in favor of paying off your mortgage…

“If you want absolute peace of mind, don’t have any debt…”

“For many people the advantage of the ‘interest deduction’ is a myth perpetuated by by real estate agents, mortgage brokers, and even your friends…”

“Mortgages lose their interest rate deduction efficiency as they get older. This [is because] you are paying more principal towards the end of the loan…”

“Take opportunities to pay off a little of the capital on your mortgage whenever you can — even if it seems like an insignificant amount.”

“I prefer not to have one and say get rid of them as fast as you can. Debt will kill you.”

“There’s a great feeling in living in a home you own outright.”

What say you?

While I know that I number of you have weighed in on this already, I still thought it would be worth asking… As I’ve noted previously, we’re doing a bit of both. We’re paying down our mortgage ahead of schedule, but we’re not committing every last penny to the effort. Instead, we’re directing a sizable chunk of our ‘discretionary’ funds to our investment portfolio.

Follow me on Twitter!

---
Related Articles at fivecentnickel.com:

» Pay Off Mortgage Early? Or Invest?
» What is a Mortgage Escrow Account?
» Help a Reader: Mortgages from ING Direct
» How to Pay Off Your Mortgage Early
» Debt Reduction vs. Retirement Savings
» How to Decide When to Refinance Your Mortgage
» Reaching the Mortgage Crossover Point
» More Thoughts About Refinancing Our Mortgage

As a followup to last week’s post about finding the best mortgage rates, I just wanted to remind you that there is no such thing as a free lunch. I mention this because those of you that are in the market for a new mortgage are likely to be confronted by offers for a “no-cost” refinance. While this isn’t necessarily a bad thing, it’s important to know what you’re getting into.

What’s a “no-cost” mortgage refinance?

A “no-cost” refinance is one in which the lender or broker covers the closing costs on your new mortgage. Depending on where you live, you can expect to pay 2-3% of the loan amount when closing a typical mortgage, so this is a great deal. Right? Well…

The reason I keep putting the term “no-cost” in quotes is because there actually is a cost — you just don’t typically see it. In other words, the lender doesn’t eliminate the costs, they simply convert them into another form. In most cases, this means that you’ll wind up paying a higher interest rate.

It works like this… Just as you can buy points to reduce your mortgage rate, you can increase your mortgage rate in return for negative points. Each point is equal to 1% of the loan amount. By accepting a higher than market rate on your loan, you can generate cash back that lender can use to cover the closing costs.

Clearly, this approach is most beneficial to those with a short time horizon, as they’ll enjoy the upfront cost savings without having to live with that higher rate for very long. If you decide that the “no-cost” option is best for you, be sure to get a full rundown of the costs that are covered so you can make a meaningful comparison across lenders — not everyone covers all the same things.

“No-cash” is not the same as “no-cost”

Perhaps the biggest mistake that you can make when shopping for a “no-cost” refinance is to wind up with a “no-cash” deal instead. While the names sound very similar, these are very, very different products. With a “no-cash” refinance, the closing costs are rolled into the balance of the new loan.

Because there aren’t any negative points involved with a “no-cash” refinance, the rate will likely appear more competitive on a “no-cost” refinance. Unfortunately, you’ll wind up paying the fees yourself over time plus interest.

Follow me on Twitter!

---
Related Articles at fivecentnickel.com:

» How to Decide When to Refinance Your Mortgage
» Calculating Your Mortgage Refinance Payback Period
» More Thoughts About Refinancing Our Mortgage
» Mortgage Refinance Rates Continue to Fall
» Mortgage Refinance Complete
» Deciding When to Refinance Your Mortgage
» How to Pay Off Your Mortgage Early
» Reaching the Mortgage Crossover Point

As a followup to last week’s article on whether or not you should pay off your mortgage early, I thought I’d talk a bit about how to find the best mortgage rates. To date, we’ve bought two houses, sold one, and refinanced three times. Thus, we have a good bit of personal experience when it comes to finding a mortgage. What follows are some tips that we’ve picked up along the way.

Check your credit

Given all that’s transpired over the past year or so, it should come as no surprise that your credit score is more important than ever when it comes to getting a great deal on a mortgage. As such, your first step should be to check your credit report and fix any errors that you find. Just be sure to give yourself enough lead time to get things sorted out. Here’s why…

I recently ran across a panicked letter that I faxed to Chase back in 2001. As it turns out, I checked our credit report before applying for our first mortgage and discovered a delinquency that had never happened. When I contested this with the credit bureau, Chase came back claiming that the information was accurate. Thus, the black mark stayed on our record.

Because I didn’t discover this problem until the last minute, time was running short, and I had to quickly resolve the problem directly with Chase. I ended up faxing them a letter the day before we applied for our mortgage explaining the situation and essentially begging them to help us out. In the end, we got the problem taken care of, but we could’ve avoided a lot of stress by simply starting sooner.

Beyond making sure your credit report is accurate, you might also want to check out your credit score itself. Unfortunately, while you’re legally entitled to free access to your credit report, the same is not true of your credit score. The good news is that you can get a free peek at your credit score if you’re willing to jump through some hoops… Simply sign up for a free trial at FreeCreditReport.com or MyFICO. Just be sure to cancel before you get charged.

Get the lay of the land

If you haven’t already decided what sort of mortgage you’re looking for, online mortgage marketplaces are a great way to get a feel for the prevailing rates on different types of mortgage. Alternatively, you can check current mortgage rates on a site like ShopRate. In either case, you can quickly compare rates on fixed vs. adjustable rate mortgages, 15 vs. 30 year terms, etc. With that info in hand, it’s much easier to identify the best option for your situation.

Find the best mortgage rate

Once you know what you’re looking for, check the mortgage rates offered by your local bank or credit union. Their rates may or may not be competitive, but you’ll never know if you don’t ask. Beyond that, you should consider asking friends or family if they can recommend a reputable mortgage broker.

While a mortgage broker isn’t absolutely necessary, working with one can make finding the best mortgage deal much easier. Ideally, you should contact more than one broker and see what they can offer you. Just be sure to ask for a “good-faith estimate” from each so you can make an informed comparison based on the full rundown of rates, fees, etc.

Once you’ve found what appears to be the best deal, start shopping it around. Go back to your bank, any other brokers that you’ve had contact with, etc. and see if they can beat it. Even if they can’t beat the rate, they might be able to sweeten the deal by knocking some money off your closing costs, etc. Remember, you’re looking for the best overall deal, not just the lowest rate. A bit of extra work here can pay huge dividends.

Of course, you should also be comparing these offers back to the rates that you found online. Just be careful… I’ve found that some lenders are less than honorable when it comes to making good on the rock bottom rates that they advertise online.

Some words of warning

If you’re buying new construction, you might feel some pressure to use the builder’s “preferred” lender. While they’ll likely offer to throw in some freebies if you use their guy, you probably won’t get the best overall deal if you simply say “yes.” Instead, negotiate with them on this point.

When we bought our first house, we agreed to use the builder’s lender, but only if they matched the best deal we could find. We also negotiated to get the freebies even if their mortgage guy couldn’t match our best deal. This put a lot of pressure on them to deliver, and they ultimately came through.

Finally, when it comes time to close, be sure to read everything they put in front of you. You might feel like uncomfortable making the closing attorney sit there while you read through all the paperwork, but that’s their job. If you simply can’t stomach doing this, you at least need to go over your HUD-1 settlement statement (which lists all the details of your deal) with a fine-toothed comb.

When we bought our first house, we had an 80/10/10 “piggyback” mortgage. While everything was fine with our first mortgage, the settlement statement listed the wrong (higher) rate for our second mortgage. Obviously, this could’ve caused a lot of trouble if we hadn’t been paying attention.

Follow me on Twitter!

---
Related Articles at fivecentnickel.com:

» Mortgage Refinance Complete
» Deciding When to Refinance Your Mortgage
» An End to Rising Rates?
» Mortgage Refinance Rates Continue to Fall
» More Thoughts About Refinancing Our Mortgage
» Finding a Mortgage
» Locking in Our Interest Rate
» Beware the “No-Cost” Mortgage Refinance

Should you pay off your mortgage early? Or should you focus on investing with your spare cash? This is one of the most hotly debated topics in personal finance, with vocal proponents on both sides. Today, I thought I’d take a look at this issue from both angles and then share our approach with you.

Why you should pay off your mortgage early

One of the biggest advantages of paying off your mortgage early is peace of mind. Once you’ve paid it off, you’ll wake up every morning and fall asleep every night knowing that the roof over your head is 100% yours. For many people, you can’t put a price on that sort of security.

Beyond the comfort/security aspect, paying off your mortgage early is a bit like locking in a guaranteed investment return. For every dollar that you pay early, you’re “earning” the interest that you would’ve otherwise paid on it over the balance of the loan period. This sounds great, right? Well…

The flip side of the “guaranteed investment return” argument is that mortgage interest rates are often quite low, and interest payments on a mortgage are also tax deductible (for those that itemize). These factors make early payments lose a bit of their luster.

Another advantage of paying off your mortgage early is that doing so protects you from yourself. While paying the minimum on your mortgage and investing the difference might sound like a great idea, there are no guarantees that you’ll actually follow through on the second part of the equation.

To see how long it might take you to payoff your mortgage, there’s a mortgage payoff calculator at this site for mortgage calculators

Why you shouldn’t pay off your mortgage early

The biggest downside to paying off your mortgage early is the (potentially large) opportunity cost that you’ll face. By this I mean that you’ll be giving up investment returns that might significantly outpace your mortgage interest rate.

In other words, why pay off a 5% mortgage when you could be earning 8-10% on that money? Of course, one only has to look at the past year to know the answer… Those sort of returns aren’t guaranteed, whereas the mortgage savings are.

Another important point to consider is the effect of inflation. Over time, inflation erodes the value of the dollar. This means that your future mortgage payments will effectively cost less than they do now, as the money you’ll be sending in won’t be worth as much in terms of “real” buying power.

What are we doing?

Instead of pretending to know what’s best in your situation, I though I’d tell you what we’re doing. We’ve actually gone back and forth on this issue, but ultimately decided to do a bit of both. And yes, I know that answer is a total cop-out, but it is what it is.

We are currently in the fortunate position of being able to max out our retirement accounts while having enough left over to put some extra cash toward our mortgage and to work on building up a non-retirement portfolio, so… That’s exactly what we’re doing. I view it as a bit of extra diversification.

A bit over a year ago, we refinanced from a 30 year fixed rate mortgage down to a 15 year fixed rate mortgage. In doing so, we cut our time horizon in half. Beyond that, we’ve been sending in an extra principal payment every month, further reducing the time until we’re mortgage-free.

Admittedly, this hasn’t been an easy decision for us, and we’re still tempted to waver at times. After all, now is a great time to refinance, and I also suspect that there’s a good bit of inflation looming just around the corner.

Given the above, we’ve been tempted to refinance into a rock bottom 30 year fixed rate mortgage and pay it off as slowly as possible while we focus on building our investment portfolio. However, a wise man recently reminded me that “pigs get fat, but hogs get slaughtered.” In other words, it pays to be greedy, but not too greedy. In the end, we opted to stay the course.

What about you?

Where do you stand on the mortgage pre-payment issue? Are you looking to get out of debt come hell or high water? Or are you paying off your mortgage on schedule while focusing on your investments?

Follow me on Twitter!

---
Related Articles at fivecentnickel.com:

» More Thoughts on Paying Off Your Mortgage Early
» Debt Reduction: Share Your Story
» Are Biweekly Mortgage Payment Plans Worthwhile?
» How to Pay Off Your Mortgage Early
» Dave Ramsey’s Baby Steps
» What Would You Do With $1000?
» What is a Mortgage Escrow Account?
» Pay Off Debt or Invest?

Over the past few years, I’ve thought a lot about buying investment property. In the long run, I’d love to build a portfolio of rental properties. We have not, however, had the time to make it happen. Given the recent history of housing market, perhaps this is a good thing.

Of course, those same housing troubles have now (arguably) created a lot of opportunities. In many areas, home prices have fallen dramatically, and the number of foreclosures has skyrocketed.

Given the above, a recent article in Money Magazine that provided tips for buying a foreclosed home piqued my interest. For starters, they pointed out that (nor surprisingly) it’s easier than ever to find foreclosed homes. Beyond that, they offered the following four tips on the mechanics of the process.

Tips for buying a foreclosed home

• It’s best to buy from a bank. If you buy a foreclosed home at auction, prior to repossession by the bank, you may have to pay cash, and you may not be able to inspect it. You might also discover that there are existing liens against it. When a back repossesses a home, they should clear any outstanding liens.
• Bring in a contractor before you buy. Foreclosed homes have often been abandoned, and possibly vandalized. Instead of simply relying on a home inspector to point out the flaws, bring in a contractor and ask for an estimate of how much it will cost to fix everything.
• Bid low. Banks often list their foreclosures at market prices, so be prepared to haggle with them. If the home you’re interested in has been on the market for awhile, or if the bank has a large number of foreclosures on hand, they’ll be more willing to deal.
• Be prepared to wait. Many lenders are dealing with a huge number of properties, and it might take them awhile to respond. According to the article, the wait can be as long as three months (!) in some cases.

Having never been through the process myself, there’s not a whole lot I can add to this. Obviously, it’s very important to do you homework, as making a mistake could be very costly. If you’ve been through the process of buying a foreclosed home, I’d love to hear your thoughts.

Source: Money Magazine

Follow me on Twitter!

---
Related Articles at fivecentnickel.com:

» Buying Foreclosures Can Be Risky
» Buying a New Car, Part III
» Income Tax Breaks in the Bailout Bill
» From the Archives (September 14th – September 20th)
» The Foreclosure Crisis: Location, Location, Location
» Home Depot Coupons on eBay (Followup)
» Why is Your Home the Best Investment?
» Using IRA Funds to Buy a House – Good or Bad Idea?

Remember when I talked about how the foreclosure crisis is much more localized than the mainstream media would have you believe? Well, check this out… According to a recent report in USA Today, 35 counties accounted for 50% of the foreclosures that occurred in 2008. Amazing how such a small cross-section of the county could drag us down, isn’t it?

Follow me on Twitter!

---
Related Articles at fivecentnickel.com:

» The Foreclosure Crisis: Location, Location, Location
» Effect of Foreclosure, Short Sale, and Bankruptcy on Your Credit Score
» Weekly Roundup – Massive Failure Edition
» Buying Foreclosures Can Be Risky
» Carnivals – Week of 04/24/06
» Carnivals – Week of 08/27/07
» The Best of FCN – Selections from 04/06
» Buying a Foreclosed Home

If you listen to media reports, you might think that there’s an astronomical foreclosure crisis affecting every neighborhood in America. But guess what? A recent study by University of Virginia researchers has revealed that 87% of the dollar losses stemming from foreclosure activity were concentrated in just four states: California, Florida, Nevada, and Arizona.

Sure, you could argue that these states (or at least California and Florida) are quite large, and thus account for a disproportionate number of housing units, rendering these numbers meaningless, but consider this… California accounts for just 10% of the nation’s housing units, but it had 34% of the foreclosures in 2008.

You might also argue that expressing this in terms of dollar losses as opposed to actual foreclosures tends to skew things a bit. For example, the median home value in California in 2007 was 8.3x the median income, whereas the median home value nationally was just 3.2x the median income. In other words, prices had farther to fall in California than elsewhere, so perhaps the dollar amounts are inflated.

Looking at the raw numbers, however, reveals that these four states still account for a disproportionate number of actual foreclosures. In fact, there were just over 2.3M properties foreclosed on nationwide during 2008, with nearly half of these (just over 1.1M) happening in these four states alone.

This kind of puts things in perspective, doesn’t it? Sure, there are still other locales that are really hurting, and the housing market sucks in general, but the foreclosure crisis doesn’t appear to be nearly as widespread as the media would have us believe.

Hat tip: Reason.com

Follow me on Twitter!

---
Related Articles at fivecentnickel.com:

» The Foreclosure Crisis, Revisited
» Buying a Foreclosed Home
» Online Cost-of-Living Calculators
» Geographic Location: How it Affects Your Wealth
» Cheap Alternatives for Making Long Distance Phone Calls?
» Amazon’s Price Drop Policy
» Become an Amazon.com Price Drop Ninja
» Another Amazon Price Watch Tool

Are you eligible for the new $8,000 first-time homebuyer tax credit? Wondering how to claim it? Well, you’ve come to the right place. Earlier today, a sharp-eyed reader named Sonny pointed out that the IRS just issued a revision to Form 5405 yesterday. This form, title “First-Time Homebuyer Credit” walks you through the process of claiming your credit.

In hopes of answering a few FAQs, here are some tidbits from the instructions:

Who Can Claim the Credit

In general, you can claim this credit if you purchased you main home located in the United States after April 8, 2008, and before December 1, 2009 and you (and/or your spouse if you are married) did not own any other main home during the 3-year period ending on the date of purchase. If you build a home, you are assumed to have purchased it on the first day that you occupied it.

Who Cannot Claim the Credit

You cannot claim the credit if your modified adjusted gross income (MAGI) is $95k or more ($170k or more for married filing jointly). You are also excluded if you are a non-resident alien, your home is located outside the United States, you acquired the home gift or inheritance, or you purchased it from a related person. There are also a few other somewhat esoteric exclusion, so be sure to read the form carefully.

Details of the Credit

For homes purchased in 2008… The credit will still be little more than an interest-free loan which will have to be paid back in 15 equal installments starting in 2010. If your home ceases to be your main home before the 15 years is up, you’ll have to pay back the balance in the year in which you move.

For homes purchased in 2009… The repayment requirement is waived as long as it’s your main home for the 36 month period beginning on the purchase date. If your home ceases to be your main home within that 36 month period, you’ll have to pay back the credit in the year in which that happens. There are some exceptions, so be sure to read the instructions carefully.

The amount of the credit is the smaller of $7500 ($8000 for homes purchased in 2009) or 10% of the purchase price of the home. You get the full amount if your MAGI is less than $75k ($150k for married filing jointly). The credit is gradually phased out from $75k-$95k ($150k-$170k for married filing jointly).

What This Means for You

If you’re using a tax pro, make sure they’re up to speed on these changes. They should be, but you can never be too careful. If you’re using tax prep software such as TurboTax or TaxCut, be sure to download any updates (the online versions should be automatically updated). If you do your taxes by hand, be sure to download and use the latest version of IRS Form 5405.

Follow me on Twitter!

---
Related Articles at fivecentnickel.com:

» $8,000 Homebuyer Tax Credit
» $15,000 Homebuyer’s Tax Credit is Back on the Table
» $15,000 Homebuyer Tax Credit
» Did Congress Make the Homebuyer Tax Credit Retroactive?
» Have You Filed Your Taxes Yet?
» Pay Back the Homebuyer Tax Credit?
» Congress Extends $8000 Homebuyer Tax Credit, Adds New $6500 Credit
» $15,000 Homebuyer Tax Credit Dropped from Stimulus Package

A reader named Brett recently wrote in to ask for advice on finding a good deal on a new home. He and his wife are in seemingly stable jobs, and they’re looking to buy their first home. In a nutshell, he was wondering how to: (1) tax advantage of the forthcoming homebuyer tax credit, (2) get a great rate on a mortgage, and (3) find a good property at a good price.

That’s a pretty tall order, but I’ll take a whack at it.

Taking the Tax Credit

Changes to the first-time homebuyer tax credit have been fast and furious over the past week or so and, frankly, I’m getting a bit worn out from talking about it. If you’re sick of hearing about it, feel free to skip down to the next section. But if not, please read on…

In the beginning, it was essentially a $7,500 interest free loan. Then the House of Representatives decided to remove the repayment requirement. The Senate then followed up by increasing it to a $15,000 tax credit with no repayment requirement and no first-time homebuyer limitation. But then… When the House and Senate got together to work through their differences, it got knocked back down to an $8,000 first-time homebuyer credit.

As of right now, the details surrounding this are still somewhat murky. It sounds like it will apply to homes purchases between January 1 and August 31 of this year, and that the income limits will be $75k for single filers and $150k for joint filers. My best advice here is to simply keep your ears open and listen for details as they come available. There should be more info soon.

Getting a Great Deal on a Mortgage

Unfortunately the 4% mortgages that were floated by the Senate never materialized. Nonetheless, there are still great deals to be had when it comes to finding a mortgage. Given that lenders have become increasingly risk averse, one major factor in landing a great mortgage rate will be having a high credit score. Unfortunately, while there are things you can do to improve your credit score, they all take time. Thus, if your score is currently in the crapper, finding a low rate might be tough.

The only other advice that I can offer here is to ask around and find a reputable mortgage broker. If you get multiple recommendations, all the better. Contact them all to establish a relationship and see what they have to offer. Then, when you get closer to actually buying a house, take the best offer that you can get and shop it around to the other brokers. See if they’ll beat it. Many brokers are hungry for business, and will do whatever they can to win you over. Beyond finding a low rate, you might be able to get some concessions on closing costs, etc.

Getting a Great Deal on a House

Real estate is so intensely local that it’s hard to give good advice from afar. On top of that, there’s a lot of disagreement about where we are with regard to finding the bottom of the market. That being said, I can offer one fairly generic tip, and that is to keep a close on how long various properties have been on the market. One trick that many realtors/sellers will use is to de-list and then re-list a property that has been on the market for awhile. With a fresh listing date, it won’t look like it’s been on the market as long, but that doesn’t make the sellers any less desperate to sell.

What About You?

Do you have any tips to add to what I’ve written above? If so, please don’t hesitate to share them in the comments.

Follow me on Twitter!

---
Related Articles at fivecentnickel.com:

» Q&A: Earnest Money
» Home Inspection Today
» Home Inspection Complete
» Printable Lowe’s Moving Coupon
» The Home Office Tax Deduction
» Home Depot Coupons on eBay (Followup)
» From the Archives (May 20th – May 26th)
» (Not) Home for the Holidays

According to recent media reports, leading Senate Republicans are looking to spice up the economic stimulus plan by pushing 30 year mortgage rates down into the 4% range. Details of the plan aren’t yet available, but:

Presumably, borrowers would be required to meet stringent loan requirements of the kind the lending industry reinstated in the aftermath of the meltdown from subprime mortgages, which required little documentation of income or other evidence of ability to pay.

It’ll be interesting to see how this develops. While we currently have a 15 year mortgage that we’ve been paying down ahead of schedule, it would be awfully hard to turn down a 30 year fixed rate mortgage at 4%. Talk about an inflation hedge!

Follow me on Twitter!

---
Related Articles at fivecentnickel.com:

» 40 Year Mortgages Going Mainstream
» Help a Reader: Mortgages from ING Direct
» Escape Your Mortgage Due to a Bank Failure?
» Getting a Good Deal on a New Home
» links for 2007-08-19
» More Thoughts on Paying Off Your Mortgage Early
» Refinancing Our Mortgage
» Weekly Roundup – 05/04/07

As I noted on Friday, changes are afoot when it comes to the $7500 first time homebuyer tax credit. More specifically, there has been talk of converting this from a pseudo-credit that actually has to be paid back into a true credit. I just wanted to follow up on that article with a bit more information from this summary of the “American Economic Recovery and Reinvestment Plan” from the House Ways and Means Committee:

“Refundable first-time home buyer credit. Last year, Congress provided taxpayers with a refundable tax credit that was equivalent to an interest-free loan equal to 10 percent of the purchase of a home (up to $7,500) by first-time home buyers. The provision applies to homes purchased on or after April 9, 2008 and before July 1, 2009. Taxpayers receiving this tax credit are currently required to repay any amount received under this provision back to the government over 15 years in equal installments, or, if earlier, when the home is sold. The credit phases out for taxpayers with adjusted gross income in excess of $75,000 ($150,000 in the case of a joint return). The bill would eliminate the repayment obligation for taxpayers that purchase homes after January 1, 2009. The provision would retain the credit recapture if the house is sold within three years of purchase. This proposal is estimated to cost $2.562 billion over 10 years.”

As frustrating and unfair as this change will seem to people that took advantage of the credit in 2008, the limitation of this change to 2009 actually makes sense. After all, the goal is to get people to go out and buy houses, which means that people that have already taken the plunge aren’t the target audience.

Thanks to Ross for digging this up!

Follow me on Twitter!

---
Related Articles at fivecentnickel.com:

» $8,000 Homebuyer Tax Credit
» Did Congress Make the Homebuyer Tax Credit Retroactive?
» $15,000 Homebuyer Tax Credit
» $15,000 Homebuyer’s Tax Credit is Back on the Table
» Congress Extends $8000 Homebuyer Tax Credit, Adds New $6500 Credit
» $15,000 Homebuyer Tax Credit Dropped from Stimulus Package
» $7500 First Time Homebuyer Tax Credit
» Refundable vs. Non-Refundable Income Tax Credits

Last night, a reader named Heather asked the following question:

We are debating about whether or not to take the $7500 from the government for being first time home owners. In 2 years, we will have to start paying “them” back $500 for the next 15 years. If we were to sell our house in that time and not make a profit, the debt would be forgiven. I’m not sure I want to owe anyone anything, but hubby thinks of it as an interest free loan… What’s your take on this?

Oddly enough, I was in the process of writing about the first time homebuyer credit when her question rolled in. Weird. Anyway…

The First Time Homebuyer Tax Credit

When it was first proposed in the “Housing Rescue Bill,” the first time homebuyer tax credit was, as Heather noted, little more than an interest free loan (more on this below).

According to IRS guidance, the credit:

• Applies to homes purchased after April 8, 2008 and before July 1, 2009
• Reduced a taxpayer’s tax bill or increases their refund dollar-for-dollar
• Is fully refundable, meaning that you can get it even if you owe not taxes

The amount of the credit is 10% of the purchase price of the home in question, up to a maximum of $7,500 for single taxpayers, or married couples filing jointly. There are, however, a couple of catches…

For starters, the credit is phased out based on your modified adjusted gross income (MAGI). For married couples filing jointly, the credit phases out between $150k-$170k. For all others, the phase out range is $75k-$95k.

The other problem is that it’s not really a credit. Rather, this “credit” has to be paid back in equal installments over the next 15 years along with your taxes. Not such a great credit anymore, huh?

That’s the bad news. The good news is that changes may be afoot…

Conversion to a True Credit?

House Democrats recently outlined their $835 billion economic stimulus package, and one of the things that they’re hoping to do is make the homebuyer tax credit a true credit — with no repayment necessary. Of course, this is still subject to negotiations between the House and Senate, and to passage of the economic stimulus package itself, but…

If it happens, buyers who qualified for the credit in 2008, or those who do so in 2009, will be relieved of the repayment requirement. Is this enough to make you go out and buy a house? Probably not. But if you’re buying one anyway, be sure to take advantage.

Update: The Senate just passed an amendment to the stimulus bill that would create a $15,000 tax credit with no repayment requirement. Moreover, it would be available to all purchasers, not just first-time homebuyers.

Follow me on Twitter!

---
Related Articles at fivecentnickel.com:

» $8,000 Homebuyer Tax Credit
» $15,000 Homebuyer Tax Credit
» Refundable vs. Non-Refundable Income Tax Credits
» First Time Homebuyer Tax Credit Followup
» Did Congress Make the Homebuyer Tax Credit Retroactive?
» Getting a Good Deal on a New Home
» $15,000 Homebuyer’s Tax Credit is Back on the Table
» Ten Common Income Tax Credits

For those of you that haven’t been paying attention, mortgage rates are once again in very attractive territory. On top of that, the Federal Reserve just cut rates, and the Treasury Department is talking about driving 30 year fixed rates down into the 4.5% range in an attempt to stimulate the real estate market. With that as a backdrop, here are some thoughts about mortgage rates and refinancing…

The Federal Reserve and mortgage rates

First, it’s a common misconception that Federal Reserve interest rate changes drive the mortgage market. In fact, these rate cuts apply to short-term interest rates, and they typically have little to no direct effect on fixed-rate mortgages. That being said, adjustable rate mortgages (ARMs) may be more sensitive to these sorts of rate changes. In fact, depending on the terms of your loan, those of you with ARMs might see lower rates when the next time your loan resets.

The Treasury’s plan to drive down mortgage rates

Second, while it’s true that the Treasury is interested in driving 30 year fixed rates down into the 4.5% range, rumor has it that such loans will only be available to purchases, and not for individuals interested in refinancing. Of course, if fixed rates for purchases do go that low, refi rates are likely to follow at least partway.

Deciding when to refinance your mortgage

Of course, there are other considerations that go into deciding when to refinance your mortgage. For example, if you’re currently upside down on your home (i.e., you owe more than it’s worth) then you’re likely out of luck regardless of where rates go from here. But assuming that you’re in a position to actually refinance, I suggest that you run the numbers for yourself and see what makes sense.

I’ve previously written about deciding when to refinance your mortgage, and that information is applicable now as it was then. Your first step should be to head over to figure out your breakeven point and your total savings from refinancing. The former will tell you how long it will take to recover your closing costs — the sooner the better. The latter tells you how much interest you’ll save if you pull the trigger and refinance. With this info in hand, you’ll be able to make an informed decision.

Follow me on Twitter!

---
Related Articles at fivecentnickel.com:

» Calculating Your Mortgage Refinance Payback Period
» How to Decide When to Refinance Your Mortgage
» Beware the “No-Cost” Mortgage Refinance
» Mortgage Refinance Rates Continue to Fall
» Mortgage Refinance Complete
» Help a Reader: Mortgages from ING Direct
» Reaching the Mortgage Crossover Point
» Pay Off Mortgage Early? Or Invest?

According to recent reports, mortgage giants Fannie Mae (FNM) and Freddie Mac (FRE) are on the cusp of failure, and may be taken over by the federal government as soon as this weekend. The two companies, which together account for nearly half of the nation’s $10+ trillion in mortgage debt, have piled up $14 billion in debt over the past year and are facing additional losses going forward.

The news of the looming takeover broke following a report by the Mortgage Bankers Association that more than 4 million American homeowners were either behind on their payments or in foreclosure at the end of June. That’s a record 9% of all mortgagees.

The takeover, which is expected to cost taxpayers in the neighborhood of $25 billion, was made possible in part by the so-called Housing Rescue Bill, which was signed into law in late July.

Since this news first broke (after the financial markets closed on Friday), shares of both companies have tumbled over 20% in after-hours trading. It’ll be interesting to see how the markets react when they re-open on Monday.

Source: Business Week

Follow me on Twitter!

---
Related Articles at fivecentnickel.com:

» 40 Year Mortgages Going Mainstream
» Breaking News: Citi to Acquire Wachovia
» Inside the Housing Rescue Bill
» Second Stimulus Check? Another One Might be on the Way
» Inside the Economic Rescue Plan: One Giant Bailout
» IRS Deadline Looming
» What Happens to Your CDs When a Bank Fails?
» Carnivals – Week of 04/21/08

A reader named Brian recently wrote in with the following quandary:

We own a condo in Las Vegas. It was purchased 5 years ago at a value of $200K. It currently is valued at $125K. The loan we have is for $163K and it is interest only with a 4 point margin on top of the current Fed* interest rate. We cannot re-finance because of this and feel handcuffed as a result. Can you offer any advice to me?

If you read through the comments, you’ll see that Brian and his wife are currently renting out the condo. Unfortunately, they’re paying substantially more on their mortgage than they can get in rent, and they have no prospect of moving into it to save money because they currently live in another state.

This is definitely a tough spot to be in, and I’m afraid that I don’t have any magical words of advice that would fix this situation. It’s a slow market and, even if they were able to sell for the current value of $125k, they’d have to come up with an $38k in cash to pay off the mortgage ($45.5k after factoring in a 6% realtor commission).

If they were living in the condo and hadn’t owned it for so long, I’d suggest they try getting into a more affordable FHA mortgage under the terms of the so-called Housing Rescue Bill. Unfortunately, Brian and his wife don’t qualify.

So, dear readers… Do you have any suggestions for Brian?

*It appears that the “Fed” rate in question is the prime rate (currently 5%).

Follow me on Twitter!

---
Related Articles at fivecentnickel.com:

» Shopping for Homeowner’s Insurance on a Condo
» Conservation Fund: Matching Donations Followup
» Paying Off Fixed vs. Variable Interest Debt
» Weekly Roundup – 06/30/06 (A Few Days Late)
» Americans Moving Back Into the City
» Weekly Roundup – New Voices Edition
» Help a Reader: CDs at a Defunct Bank
» Opt Out of Pre-Approved Credit Offers

If you’re in the market for a home or looking to refinance, you might want to check into an FHA home loan. In fact, as I’ve noted, access to FHA loans is a cornerstone of the housing rescue bill that was recently signed into law. With that as a backdrop, I thought I’d take a closer look at this sort of mortgage.

What is an FHA home loan?

FHA loans are mortgages that are insured by the Federal Housing Administration. The FHA doesn’t actually make loans; rather, they insure loans issued by federally qualified lenders. These loans are only made to individuals and non-profit/government agencies that are approved to participate in U.S. Department of Housing and Urban Development (HUD) programs (more on qualifying, below).

Advantages of an FHA vs. conventional home loans

FHA home loans have a number of advantages over conventional home loans. These include a lower required downpayment, competitive interest rates, lower closing costs that can be included in the amount of the loan, the ability to include re-modeling/repair costs in the amount of the loan, no pre-payment penalty, and possible leniency during hard financial times, which may translate into a reduced risk of foreclosure.

You can also often qualify for an FHA loan even if you’ve had relatively recent financial problems. For example, you may be able to obtain an FHA loan within 2-3 years of bankruptcy or foreclosure as long of you’ve maintained good credit in the mean time. It’s also easier to use gifts to cover your downpayment and/or closing costs when using an FHA loan product.

Disadvantages of an FHA vs. conventional home loan

Despite the foregoing advantages of FHA loans, there are also some drawbacks of this type of mortgage. For example, an FHA loan might not be large enough to cover the cost of the home your are interested in buying. While the FHA periodically increases their limits, these sorts of limits are a big part of the reason that FHA loans lost favor starting in the 1990s – as home prices began shooting up, more and more properties were ineligible for an FHA loan. If you’re curious about FHA loan limits in your area, check out this calculator.

Another potential disadvantage of FHA home loans is that they don’t come in as many flavors as conventional loans. Rather, they’re designed specifically to serve the needs of long-term homeowners, and thus tend to have relatively conservative terms. In addition, while you might end up paying private mortgage insurance (PMI) on a standard home loan, the insurance premiums associated with an FHA home loan are built into the loan, such that you may end up paying more for your mortgage insurance over the life of the loan.

Qualifying for an FHA home loan

While anyone can apply for an FHA home loan, they are most frequently used by first-time homebuyers. To apply, you must have a valid social security number and be a legal U.S. resident. The FHA’s mortgage programs do not typically have income limits, though you must have sufficient income to qualify for the mortgage payment alongside any other debts that you might have. Likewise, the FHA doesn’t have minimum credit score requirements, though past credit performance will likely be used in determining eligibility.

For more information about FHA Loans check out the FHA experts blog at FHALoanPros.com

Follow me on Twitter!

---
Related Articles at fivecentnickel.com:

» The Ins and Outs of Bridge Loans
» Help a Reader: Upside Down on a Condo
» Paying Off Fixed vs. Variable Interest Debt
» Qualifying for an ‘Economic Stimulus’ Tax Rebate Check
» The Best of August 2008
» Free Filing to Get Your Economic Stimulus Tax Rebate Check
» FHA Loans, Mortgage Insurance Premiums, and My Extra Income
» Locking in Our Interest Rate

In case you missed it, Congress has passed the so-called Housing Rescue bill, and President Bush is poised to sign it into law despite his opposition to certain components of the bill. So what’s the Housing Rescue bill all about?

What follows is a rundown of the benefits included in the bill…

Homeowner benefits

Up to 400,000 homeowners at risk of foreclosure will be allowed to refinance into lower-cost mortgages insured by the Federal Housing Administration. To qualify, borrowers must live in an owner-occupied home, have a relatively high level of debt to income, and agree to share the profits on an eventual resale with the government. Moreover, the lenders must agree to write down the loan principals, meaning that lenders could use this an opportunity to shed bad loans and hang onto better loans.

Homebuyer benefits

Once this bill becomes law, first-time homebuyers can qualify for a tax credit of 10% of their new home’s purchase price, up to $7,500. The income caps for the full benefit are an adjusted gross income (AGI) of $75,000 for single people and $150,000 for couples who file taxes jointly. The thinking here is that the tax credit will help to stimulate a sagging real estate market. The catch is that this “credit” is essentially an interest-free loan that has to be repaid over the following 15 years.

Community benefits

The Housing Rescue bill offers nearly $4 billion to communities to purchase and rehabilitate distressed homes. The homes will then be sold to low- or moderate-income individuals with the profits being use to fund neighborhood development. The thinking here is that foreclosures have downstream effects on neighboring property values. By attempting to stem the tide of foreclosures, the bill seeks to stabilize neighborhoods and reduce this negative impact.

Fannie Mae and Freddie Mac benefits

In hopes of stabilizing the financial markets, the bill also makes explicit the government’s backing of the Federal National Mortgage Association (FNMA, or Fannie Mae) and the Federal Home Loan Mortgage Corporation (FHLMC, or Freddie Mac). Fannie Mae and Freddie Mac own a combined total of $5 trillion in U.S. mortgages, nearly half the nation’s total.

The Treasury now has the power to rescue both companies through loans or cash infusions. The bill also makes permanent an increase in the ceiling of “conforming” loans to $625,500. This measure, which is intended to boost to the high end of the real estate market, was introduced in the original economic stimulus package.

Photo Credit: wonderal

Follow me on Twitter!

---
Related Articles at fivecentnickel.com:

» Help a Reader: Upside Down on a Condo
» Fannie Mae and Freddie Mac Failure is Looming, Takeover Imminent
» $7500 First Time Homebuyer Tax Credit
» Qualifying for an FHA Home Loan
» Inside the Economic Rescue Plan: One Giant Bailout
» A Bit of Investing Perspective
» Income Tax Breaks in the Bailout Bill
» Inside the American Recovery and Reinvestment Plan: The 2009 Economic Stimulus Package

I recently received an e-mail from a reader named Steve. For background, he’s 30 years old and has only recently started getting his financial house in order. Over the past six months, he’s built up a $2k emergency fund at ING Direct, and he’s been working to reduce his debt. That being said, he still has a decent chunk of credit card debt (around $14k) plus student loans ($9k) and a car loan ($9k).

Here’s his quandary:

My question is whether I should buy a house right now, or wait until I get married in a year or so. My thoughts revolve around two scenarios:

1. Continue saving, so I can buy the ring, pay off some credit card debt (I have about $10k), be prepared to pay for the wedding, and hopefully have enough for a down payment for house after the wedding.

2. Exhaust my savings and buy the house, which puts me basically on a month-to-month budget until I get married. This month-to-month still includes paying down my credit card debt at the same rate I’m doing it now.

My concern is that by next year, interest rates will be back up, and that if I wait until then, I’ll have lost money in the long term due to $200k on 6% versus 7%. But, if go that route, then I’ll probably end up financing a ring, a wedding, and a honeymoon — something which sounds quite bittersweet.

If I were in this position, I’d focus on debt reduction (check out NCN’s e-book on the topic) as well as building up some additional savings rather than rushing into the housing market. What better gift can you give to your future bride than a clean financial slate with a sizable buffer?

Not only would buying the house wipe out his financial cushion but, by his own admission, it would force him to take on even more debt down the road. To me, this has penny wise and pound foolish written all over it. And what’s going to happen when the air conditioning breaks down or the roof needs to be replaced? Mr. Murphy has a habit of visiting at the most inopportune times.

As for the direction of interest rates, who knows? In fact, a similar (albeit opposite) argument could be made about the direction of the housing market. Who’s to say that prices won’t continue to slide over the next year? Here again, your guess is as good as mine.

Why not focus, at least initially, on things that you can control? Things like debt reduction, building up that emergency fund, and/or saving up for a down payment. The interest rate concerns really boil down to a fear of the unknown and, while such concerns are understandable, it seems that the decision to buy a house should be based on far more than this.

What do you guys think?

Follow me on Twitter!

---
Related Articles at fivecentnickel.com:

» Our House is on the Market
» Required Minimum Distribution (RMD) Relief for 2008?
» Conservation Fund: Matching Donations Followup
» Help a Reader: CDs at a Defunct Bank
» Leverage: Home Appreciation vs. Investment Perfomance
» How to Sell a House in a Down Market
» Air Conditioning Repairs
» House Approves Tax Stimulus Package

The latest issue of Money Magazine includes a “Real Estate Survival” guide with tips for selling your house in the current down market.

Rule 1: Get real about price. Interview multiple agents, and have them each come up with a price based on recent, comparable sales and current market conditions. Don’t obsess over what you could’ve gotten had you sold a few months ago. Also consider inventory in your price range. If there are a lot of properties like yours, you might want to undercut the competition.

Rule 2: Vet your agent — especially if it’s you. Selling amidst a major market slowdown is tough work. If you’re not prepared to market the heck out of your property, consider enlisting the help of a pro. If you go this route, make sure they have a track record. Ideally, you want someone who has weathered previous market downturns.

Rule 3: Pimp your house — hire a home stager. Staging a home is all the rage these days. If you don’t know how to properly stage your home, it might be worth bringing in a pro who will help rearrange furniture, move extraneous items to storage, etc. Also browse through my tips for preparing your home for sale. You want that curb appeal as high as possible.

Rule 4: Cash will make your home look even better. Instead of offering some sort of gimmick such as a car or cruise to the lucky buyer of your home, consider throwing in some cash. Offer to pay part of the buyer’s closing costs. You might also consider throwing in an additional bounty to the realtor that brings in the buyer. Either a higher commission and a flat amount of cash. You may even be able to carve this out of the commission to the seller’s agent, but be careful… You don’t want to decrease your agent’s incentive to sell your house.

Rule 5: Underwater? Learn to swim. If you bought recently, your mortgage may be larger than what you can get for your home. According to data from Zillow.com, about 1/3 of 2006 homebuyers currently have negative equity (ouch!). If you have no choice but to move (say for a new job) you still have some options. For one, you might be able to get your employer to cover the difference. Alternatively, if the rental market is holding up, you could rent out your house while you wait out the slump. Finally, you can always sell for as much as you can and then make up the difference out of your savings.

So there you have it. Five tips for selling when nobody is buying.

Any other suggestions?

Follow me on Twitter!

---
Related Articles at fivecentnickel.com:

» Home Values, Appraisals, and Fraud
» Ten Days Until Closing
» Staging Your Home for Sale
» Help Us Find a Realtor
» Weekly Roundup – Combining Miles Edition
» What is ‘Shorting’ a Stock?
» What is the Bid-Ask Spread?
» Twelve Tips for Preparing Your House for Sale

I’ve recently been enamored with the thought of picking up a piece of lakefront property. For whatever reason, I’m very attracted to the the idea of owning a nearby bit of shoreline with a view toward building a getaway that could eventually serve as our retirement home.

Of course, this is a long-term vision, and we’re definitely still in the musing stage. We won’t be acting rashly (if at all), especially given the current uncertainty in the real estate market. That being said, I’m always interested in stories about people who own multiple properties. Over the weekend I ran across another such story while reading Don’t Mess With Taxes.

A taxing situation

The story that I’m referring to actually focused on real estate investors/speculators who’ve been struggling to stay afloat in the current market, so it’s not directly germane to our situation. Nonetheless, it’s still an interesting (and somewhat instructive) story.

The article leads in with the following ominous statement:

“Some of the biggest losers in the real estate slump are not purchasers of mansions they could not afford. They are buyers of second homes — or third ones, for that matter — who are sitting on a tax time bomb.”

The problem is that, although Congress has granted some tax relief to people who lose their primary homes, these measures don’t extend to those who default on a secondary residence or investment property. More specifically, under the Mortgage Forgiveness Debt Relief Act, a homeowner does not have to pay tax on debt forgiven by a lender as long as the loan is backed by the property the homeowner lives in. But…

For those that are upside down on a secondary residence going into foreclosure, the difference between what they owe and the eventual sale price of the foreclosed property will be treated as a taxable gift of forgiven debt. In other words, if you owe $250k on a house and it sells for $200k following foreclosure, you’ll have to pay taxes on the $50k difference. Ouch. Well deserved, but still… Ouch.

In many cases, the problem started to brew when a homeowner borrowed against the equity in the over-inflated primary residence to buy a vacation property. Often times, this was followed by borrowing against the equity in the secondary residence as it increased in value such that they could buy yet more property. Anyone with half a brain should’ve been able to see where this was headed, and yet many didn’t.

Additional downsides

As a side note, it’s worth noting that there are other unattractive tax consequences associated with secondary properties. They’re not nearly as disastrous as the situation that I outlined above, but they’re still worth knowing about. For example, you can’t claim a homestead exemption on a secondary residence. Also, unlike the case with your primary residence, you’ll face capital gains taxes on the full amount of the profits resulting from the sale of a secondary residence (unless you’ve lived in it for two of the previous five years).

So where does that leave us? Undeterred. But still undecided.

Follow me on Twitter!

---
Related Articles at fivecentnickel.com:

» Homes Sales Fall, Prices Drop
» Buying Foreclosures Can Be Risky
» Accounting for Your Home’s Value in Quicken (or the Like)
» Money Poll #14: Owning vs. Renting
» Money Moves for 2006, Part 1: Your Home
» First Time Homebuyer Tax Credit Followup
» How to Claim the First-Time Homebuyer Tax Credit
» Home Price Forecast in 100 Top Markets

Well, that was easy… Not long ago I noted that we were appealing our property tax re-assessment. For those that don’t recall, we renovated last fall and were slapped with an increase that placed our home’s assessed value well beyond fair market value.

I promptly drafted a letter to the Board of Tax Assessors using our next door neighbor’s recent home sale as a comparable sale. Yesterday, just a week or so after having sent that letter, I received a response in the mail. They “field visited” our property late last week and adjusted the value down by 3%, which puts us slightly below the sale price of our neighbor’s house. Not bad for 30 minutes or so of work.

In truth, I still think the assessment is a bit high, as the neighbor’s house is arguably considerably more valuable than ours. That being said, I probably won’t push it further. The next step would be a hearing before the County Board of Equalization, and that could go either way. The comparable sale that we used in our initial appeal is technically too recent to be valid — the house sold in March and the assessment is supposed to reflect our property value as of January 1st, a few months earlier.

Follow me on Twitter!

---
Related Articles at fivecentnickel.com:

» Appealing Our Property Tax Assessment (Again)
» Appealing Our Property Tax Re-Assessment
» Carnivals – Week of 05/19/08
» Carnivals – Week of 06/02/08
» Carnivals – Week of 04/28/08
» Home Renovation Progress (and Property Tax Assessment)
» Don’t Tax, But Still Spend
» Property Taxes on my Mind

As many of you know, we renovated our house this past fall. The work that we had done included an addition, replacement of our deck, conversion of our old laundry room into a powder room, and the construction of a small outbuilding.

Over this past weekend, our property tax re-assessment showed up in our mailbox. While I was expecting to see an increase, I wasn’t prepared for what I saw when I opened the envelope, especially given current market conditions.

As it turns out, we’ve been slapped with an increase that pushes the assessed value of our house well beyond fair market value. I know this because the house next door, which is more or less comparable to ours, though it’s a bit larger and has a concrete instead of asphalt driveway, sold within the past month for considerably less than our assessed value.

So what’s a guy to do? Appeal the re-assessment, of course. I’ve drafted a letter to the County Board of Tax Assessors outlining our case. Here it is (minus some sensitive details):

To whom it may concern,

We are writing to appeal the recent re-assessment of the following property:

[Our property details, including address and parcel number]

This property (our primary residence) was re-assessed due to renovations. However, we believe that the new assessment in that our property has been assigned a value well in excess of fair market value. What follows is our reasoning, based on a recent comparable sale directly adjacent to our property.

According to county records, our property has the following characteristics:

[Square footage, lot acreage, other pertinent details, assessed value]

The comparable property (located at 123 Next Door Street) has the following charactersitics:

[Square footage, lot acreage, other pertinent details, assessed value]

As you can see, these two properties have equivalent lot sizes, but the latter has more heated square feet and a concrete instead of asphalt driveway. Given that the assessed value of our property is substantially higher than the fair market price of a more valuable property located directly next door, we believe that an adjustment is in order.

Thank you for your time and attention to this matter.

Sincerely,

nickel and his bride

While I think we have a solid case, I’m a bit worried about that fact that the paperwork that we received states that the re-assessment is intended to reflect the fair market value of our property as of January 1, 2008. Unfortunately, the most pertinent comparable sale (that of our neighbor’s house) occurred within the past month.

The only other properties that have sold in our neighborhood within the past year or so are really different from ours in terms of lot size, square footage, etc. While it’s possible to go outside of our neighborhood for comps, we’re in a relatively isolated area, so you have to go quite a distance before you run into similar types of houses.

So… I’m going to take my best shot with our neighbor’s house as the primary data point. If things don’t work out, we can escalate our appeal beyond the Board of Tax Assessors. Either that, or we can try again next year.

Follow me on Twitter!

---
Related Articles at fivecentnickel.com:

» Appealing Our Property Tax Re-Assessment (Followup)
» Appealing Our Property Tax Assessment (Again)
» Carnivals – Week of 06/02/08
» Carnivals – Week of 04/28/08
» Carnivals – Week of 05/19/08
» Home Renovation Progress (and Property Tax Assessment)
» Don’t Tax, But Still Spend
» Property Taxes on my Mind

Finally, some positive news on the economic front… According to the National Association of Realtors, existing home sales rose in February for the first time in six months. The downside is that the 2.9% increase in sales was accompanied by a continued fall in prices. In fact, the median price tumbled by the largest amount on record during February. For what it’s worth, experts are still predicting that the real estate market won’t bottom out until later this year.

Follow me on Twitter!

---
Related Articles at fivecentnickel.com:

» Sales Tax Deduction for New Car Purchases
» Homes Sales Fall, Prices Drop
» Mall Jewelry Store ‘Sales’
» Don’t Miss These Tax Deductions
» Gas Prices Drop, American Car Buyers Forego Economy
» Sam’s Club Gas for Members Only
» Optional Sales Tax Tables are Still Available
» Home Values, Appraisals, and Fraud

This is a guest post by Lynnae of Being Frugal. If you like what you see here, please consider subscribing to her RSS feed.

I was watching the show Property Virgins for the first time the other night, and I was shocked at what I heard on that show. Let me give you a rundown…

The buyer was a single woman who wanted the best quality in a house, but didn’t want to spend a lot of money. She knew exactly what she wanted and how much she wanted to pay, and she wasn’t willing to budge much on either issue.

The property expert seemed nice enough, and she was a saint for dealing with the opinionated buyer, but halfway through the show, she said something that stopped me cold. She had just shown the buyer a home that was brand new and had everything the buyer wanted. The problem? It was $40,000 more than the buyer wanted to pay.

The ensuing conversation went something like this. These aren’t exact quotes, but you’ll get the idea.

Expert: The price on this property is $240,000.

Buyer: What? I definitely can’t afford that!

Expert: That’s about $1700 a month, not including insurance and HOA fees.

Buyer: The insurance and HOA fees are extra? I really can’t afford that. This is what I want, but I’m not paying that price.

Expert: Well, there is another option. We can do a 35 year loan and bring your payments down to $1500 a month.

Buyer: That’s just so much money! I can’t take on that much debt! (I was cheering for her at this point).

Expert, talking privately to the camera: She’s only thinking about the big number here. She can easily afford the monthly payment. That’s what she should be looking at… Whether or not she can afford the monthly payment.

That’s the point at which my jaw dropped open. She shouldn’t consider the total cost? Are you kidding me? I’m no expert, and I don’t own a home yet, but there are a few rules I’m going to stick to when I do buy.

Know What You Can Afford

When I finally take the plunge to buy a house, I’m going to figure out how much I can easily afford per month. If the bank tells me I can afford to put 30% of my income toward my mortgage payment, but I know I can only fit a payment of 25% into my budget, I’m going to figure out my target price based on what I think. I’ll figure out the approximate amount of insurance, taxes, and any other fees, and work that into the number as well. I’ll also decide what mortgage terms I want. A fixed rate, 15 year mortgage would be ideal. From there, I’ll come up with a target house price. And I won’t look at anything more expensive.

Human emotions are powerful, and when we see something we really want, we can often talk ourselves into buying it, even if we can’t really afford it. The amount of credit card debt in this country is indicative of that. I’m not going to put myself into a situation where I might be enticed into making a stupid decision that will cost me for the next 30 years.

Never Look at a House Before You Know the Price

I couldn’t believe the buyer even walked into that house without knowing how much it cost! She set herself up for disaster. As predicted, she fell in love with the house, and deeply desired to buy it, even though she couldn’t afford it. That made her vulnerable to taking on a less than ideal mortgage. I imagine that’s how many people got caught up in the mortgage crisis we have today.

Be Willing to Do Some Work

After looking at house #2 (the dream house), the buyer was shown a third house. It was a modern house, like she wanted, but it needed a little work. It was bargain priced at $174,000 and, for an additional $30k, the buyer could do enough work to bring the house up to her standards. But our naive buyer balked at the thought of doing the work.

Take Time to Think If You’re Unsure

A tactic that the property expert used on the buyer was to tell her that the properties were flying off the market like hotcakes. She kept stressing that the buyer needed to make a decision quickly, or avoid losing the property. While that may be true, if you’re hesitating about signing on the dotted line for any reason, take time to think it over. It’s better to lose out on a property than to make a $200,000 mistake. There will always be other properties, but once you buy a house, it’s difficult to undo your mistake.

So what did the buyer end up doing?

Much to my chagrin, our buyer went with expensive house #2. She negotiated the price down to $233,000, and she went with a 35 year loan. If it were me, I would have taken house #3 and gotten the same quality of home for $33,000 less. It just makes better financial sense.

The bottom line is, if you’re a new buyer, do your research. Don’t blindly trust the “experts”. Their job is to sell you a house, so they can make a commission. Though I’m sure there are many honest and helpful realtors out there, they do have a financial interest in making a sale. It’s always wise to figure out what’s best for your financial situation on your own, rather than trust someone else to do it for you.

Follow me on Twitter!

---
Related Articles at fivecentnickel.com:

» $15,000 Homebuyer Tax Credit Dropped from Stimulus Package
» $15,000 Homebuyer’s Tax Credit is Back on the Table
» $15,000 Homebuyer Tax Credit
» $8,000 Homebuyer Tax Credit
» Taxpayer Benefits in the Economic Stimulus Package
» Cash Out Roth IRA to Pay Off House?
» Using IRA Funds to Buy a House – Good or Bad Idea?
» Refundable vs. Non-Refundable Income Tax Credits

On the heels of our mortgage refinance, I thought I’d put together a rundown of all the things we did two years ago to get our old house ready for sale. What follows is a rundown of all the ‘major’ stuff that we did just prior to putting our house on the market…

1. Had a moving sale
2. Gave a bunch of stuff to Goodwill
3. Moved a bunch of stuff to storage
4. Minor drywall repair
5. Minor paint touchups throughout the house
6. Washed all windows
7. Had Stanley Steemer clean the carpets ($225 for the whole house). For what it’s worth, you can find exceptional ideas on buying, repairing, restoring, or maintaining carpets online and save money that usually falls underfoot. Cleaners, installers, and professionals offering other flooring options are offering special pricing now in the distressed economy.
8. Repaired a ground fault by replacing the cable from our house to the lamp post
9. Re-painted our mailbox and lamp post
10. Replaced exterior light fixtures on alongside garage door
11. Fertilized the lawn about two weeks before putting it on the market
12. Re-did the mulch beds with fresh pine straw

While this stuff took us a few days to get done, we actually turned a profit in that our moving sale generated more than enough in the way of profits to cover the costs of everything else, plus we had tax savings from the Goodwill donations.

When all was said and done, all three realtors that we interviewed walked through the house and said it was ready to show without doing a thing. And guess what? They were right. We sold our old house for very close to our asking price in under six days. Of course, the market was a heck of a lot better back then than it is now, but still… If you’re thinking of putting your house on the market this spring, be sure to do what you can to spruce it up.

Follow me on Twitter!

---
Related Articles at fivecentnickel.com:

» Preparing for our Moving Sale
» Appealing Our Property Tax Re-Assessment (Followup)
» How to Sell a House in a Down Market
» Staging Your Home for Sale
» Carnivals – Week of 04/21/08
» Moving Sale Results
» Sunday Roundup – Patio Furniture Edition
» Our House is on the Market

After nearly pulling the trigger and refinancing our home last spring, we finally decided to go ahead and pull the trigger on a refi yesterday. We’re currently about 1.5 years into a 30 year fixed mortgage at 6.375% (yes, rates bumped up right around the time we moved in 2006). Besides getting a lower rate, we’ve been thinking about moving to a shorter term (15 years instead of 30 years).

The search

After poking around at Bankrate.com and checking the rates at PenFed, I discovered that going rate for 30 year fixed rate mortgages (without paying any points) was around 5.875%, whereas the going rate for 15 year fixed rate mortgages was around 5.125%. On top of this, PenFed doesn’t charge any lender fees, and covers many third-party fees, as well.

Yesterday, I checked with PenFed again and was pleased to see that rates had dropped by 0.125%. Thus, I shot an e-mail to our mortgage broker to see what he could do. He responded with 15 years fixed @ 5.00% — same as PenFed. When I replied that we could get the same rate from PenFed, and that they’d cover many of the fees, he responded with an offer of 4.875% and the same fee structure. After getting a Good Faith Estimate, we decided to go ahead and lock in at that rate.

The resulting deal

So in the end, we’re getting a 4.875% fixed rate, 15 year mortgage. We’re on the hook for title and recording fees as well as the settlement attorney, whereas the broker is covering all other fees. Yes, we’ll have to bring extra money to the table for the items that we escrow (taxes and insurance), but we’ll be getting a refund of our escrow account from our old mortgage lender.

We’re only refinancing the actual balance due, so the principal on the loan is somewhat lower than our previous mortgage (though not dramatically – remember, it’s only been a year and a half). When combined with the lower rate, our overall payment is only increasing by about $225/month, yet the term of our mortgage is getting cut in half.

The actual savings are a bit hard to pin down because we’ve been overpaying our mortgage and the math is a bit convoluted. Moreover, we don’t have a crystal ball, and thus can’t necessarily project our overpayments going forward. Just comparing the raw numbers (ignoring overpayments), however, refinancing to the 15 year option could save us upward of $150k. Of course, this difference is narrowed by overpayment as well as by the fact that we’re effectively throwing away the 18 months of interest payments that we’ve already made.

A question of timing

Given yesterday’s interest rate cut, a logical question would be whether or not now is the right time to be refinancing. That’s a great question, and I don’t know the answer for certain. But given that longer term, fixed rate mortgages are relatively insensitive to short term rate fluctuations, at least in the near term, I’m comfortable with our decision. We’re reducing our rate by 1.5%, and saving thousands (and thousands) of dollars. Could we do slightly better by waiting? Maybe. But maybe not. And in the mean time, we’d be paying down a much more costly mortgage.

Update: Rates slipped further today, with PenFed offering a 15 year fixed rate for 4.625%. Oh well, 4.875% is still really low.

Follow me on Twitter!

---
Related Articles at fivecentnickel.com:

» Reaching the Mortgage Crossover Point
» Deciding When to Refinance Your Mortgage
» Mortgage Refinance Complete
» Calculating Your Mortgage Refinance Payback Period
» From the Archives – (March 16th – March 22nd)
» What Happens to Your Mortgage if Your Bank Fails?
» Carnivals – Week of 03/26/07
» More Thoughts About Refinancing Our Mortgage

“If you owe the bank $100, that’s your problem. If you owe the bank $100 million, that’s the bank’s problem.” – J. Paul Getty

Unless you’ve been living under a rock, you’ve no doubt heard that the White House has plans for a subprime bailout. In order to stem the tide of foreclosures, the Bush administration has unveiled plans to freeze the ultra-low teaser rates that were dangled in front of borrowers that shouldn’t have been lent money in the first place.

The simple fact here is that people who couldn’t afford to buy houses bought houses, and lenders that shouldn’t have loaned them the money to do so did just that. Now that these rates are resetting, many borrowers can’t afford the payments, and lenders are facing staggering losses.

Obviously, this is bad for everyone involved. The White House’s proposed solution is to freeze these teaser rates for five years for borrowers that fit certain criteria. But will this really help? As far as I can tell, a temporary rate freeze of this sort will just drag out the inevitable. Given that the affected individuals didn’t have good credit in the first place, and that credit standards have tightened up, they won’t be able to refinance to a more competitive rate in the interim, and this entire mess will just play out in slow motion.

To me, this is a bit like removing Band-Aid. We can either peel it off slowly and prolong the pain, or we can give it a good rip and get the pain and suffering over with. Yes, I realize that sounds insensitive, but… Things have gotten way out of hand, and the people who got us into this mess (on both sides) are in for some rocky times one way or another.

The other thing that really, really bugs me about this “solution” is that it smacks of an administration trying to push the worst of these problems off onto someone else. These loans will ultimately reset, but… That’ll be someone else’s problem at some point down the road. I pity whoever winds up being our next President, as this whole mess is likely to unravel in their lap right as they’re going up for re-election.

So what do you think? Am I being naive in thinking that we should just suck it up and weather the storm right here and right now? Will spreading this debacle out over time help to minimize the damage to our economy? Or will it just prolong the pain?

Follow me on Twitter!

---
Related Articles at fivecentnickel.com:

» The Best of December 2007
» Income Tax Breaks in the Bailout Bill
» A Bit of Auto Bailout Humor
» More Thoughts on Paying Off Your Mortgage Early
» 4% Mortgages Just Around the Corner?
» More Thoughts About Refinancing Our Mortgage
» Porkbarrel Spending and the Economic Bailout
» Ted Turner on the Economy

Last week I saw an interesting interview with Alan Greenspan, former Chairman of the Federal Reserve Board, on The Today Show. He has a new book out, and thus appears to be making the rounds in support of its release. While I can’t cover everything he said in painstaking detail, I did jot down a few of the more interesting tidbits…

» He claims that his biggest frustration was President Bush’s “unwillingness to wield his veto against out of control spending.” He thought that the structure of the Bush tax cut was fine, but also felt that it needed to be paid for.

» He doesn’t accept any blame for the not foreseeing the problems with the housing bubble in the United States – he claims they tried to get mortgage rates up, but failed. He further claims that all 20-30 other countries have the same problem because the low interest rates were caused by “global forces” (i.e., a sharp decline in long term interest rates).

» He thinks oil would be in the $130-$140 per barrel range if we hadn’t gone to war in Iraq: “The way I read Saddam, that’s where he was going.”

» Does he have any thoughts for new homebuyers? Yep… He’s “worried” about the current credit crunch. He further stated that “we’re going to have to go through this adjustment” just as other countries that have been experiencing a housing bubble will have to do. He further recognized that a lot of people will have “very tragic stories.”

» Finally, does he think we’re headed for a recession? Not yet. There are some open questions, but for the moment “we’re doing okay.”

For more info, check out “The Age of Turbulence: Adventures in a New World.”

Follow me on Twitter!

---
Related Articles at fivecentnickel.com:

» Greenspan Speaks: U.S. Economy in a Recession
» From the Archives (September 21st – September 27th)
» Bernanke Tabbed as Greenspan’s Replacement
» Hotties Make the Big Bucks
» Carnivals – Week of 05/29/06
» Appeal Your Health Insurance Denials
» Four Years of FiveCentNickel
» How to Make Money in the Stock Market

I just received an interesting question from a reader that relocated from New York to Denmark in 2003. They have since decided to make the move permanent, and have a question about using IRA funds to help with the purchase of a home overseas:

“Can we withdraw from our traditional IRAs to use as a down payment on a house (we are first time buyers) if that house is in another country? I know that you can do this in the United States, but am curious if we can withdraw the money without penalty if our first time purchase is overseas? Any help would be greatly appreciated!”

Let’s first set aside the issue of whether or not using IRA funds to purchase a house is a good idea. Rather, let’s take a look at the rules…

Ever since the 1997 Taxpayer Relief Act went into effect, people have been able to withdraw up to $10,000 from their traditional or Roth IRA to assist with first-time homebuyer expenses. Moreover, Roth IRA contributions can be withdrawn at any time, and for any reason, so this limit really only applies to earnings in your Roth IRA. Qualified first-time homebuyer withdrawals are potentially subject to taxes (if they represent pre-tax contributions to a traditional IRA), but are otherwise penalty-free.

So what about the issue of doing this overseas? I haven’t actually been able to come up with an authoritative answer. I looked at IRS Publication 590 as well as the instructions for IRS Form 8606 and didn’t see anything the specified where the home has to be. While my knee-jerk reaction would normally be that the home would have to be in the United States, there was a recent discussion on the Get Rich Slowly forums where this topic came up. Here’s the critical bit of the discussion:

“The interesting twist in all this is that your first home can be anywhere in the world. I couldn’t find anything in the code that explicitly addressed this so I called the IRS and spent quite a while on the phone with them; they called me back and said they couldn’t find anything that would prevent my from using my Roth IRA to help my buy my first home in Canada, and the spirit of the law is more to encourage home ownership among Americans rather than specifically for people to buy homes in America.”

Keep in mind that a forum discussion isn’t exactly authoritative when it comes to IRS rules, so… Unless someone around here can provide an authoritative answer (backed up by IRS documentation), I would recommend calling the IRS and verifying this before using those funds.

This article is part of my Money Q&A Series.

Follow me on Twitter!

---
Related Articles at fivecentnickel.com:

» How to Avoid ATM Fees
» Using IRA Funds to Buy a House – Good or Bad Idea?
» How to Write a Mortgage Gift Letter
» From the Archives (September 7th – September 13th)
» Using Retirement Funds to Pay for College
» Buying Gas With a Debit Card
» Santa Dollars and Bunny Bucks
» Home Depot Coupons on eBay (Followup)

It’s fairly well know that if you’re not at least 59-1/2 years old, you can’t generally take a distribution from your traditional or Roth IRA (or SEP-IRA, for that matter) without incurring a 10% penalty (note that Roth IRA contributions can be withdrawn at any time, for any reason, without incurring a penalty). There are, however, a number of exceptions to this rule, and one of them has to do with buying a home.

Ever since the 1997 Taxpayer Relief Act went into effect, people have been able to withdraw funds to pay up to $10,000 in first-time homebuyer expenses without incurring any penalties. Such withdrawals are, however, potentially subject to taxes. Interestingly, the IRS has a somewhat obtuse definition of “first-time homebuyers.” As it turns out, anyone that hasn’t owned a home for two years is considered a first-time buyer. And guess what? You don’t even have to be the one buying the house to qualify… The first-time homebuyer can be the owner of the IRA, the IRA owner’s spouse, or any of his or her (or his or her spouse’s) direct descendants (e.g., children or grandchildren).

Other major restrictions include a 120 day time limit for buying the house from the day after the withdrawal is made, and the house must be purchased for use as the buyer’s principal residence. Just keep in mind that the $10,000 limit is a lifetime limit – if you do this now, you won’t do it again in the future.

So.. While you can use IRA funds to aid in the acquisition of a house, does that mean that you should? In our case, my wife and I raided our Roth IRAs for cash to help with buying our first house. In fact, we knew that this was a possibility when we were funding our IRAs in the years leading up to our home purchase. Nonetheless, we figured it would be a good idea to max out our Roth contributions on the off chance we could pull off the home purchase without needing those funds. Alas, we couldn’t, so we had to pull some of that money back out.

In retrospect, I have very mixed feeling about this. On the one hand, it allowed us to buy our house without having to carry private mortgage insurance (though we still ended up going with an 80/10/10 mortgage). On the other hand, IRA contributions are limited on an annual basis. Thus, when we pulled money out, we were limited in our ability to put it back in. We’re now in the situation where we can’t contribute to our Roth IRAs because we exceed the income limits. I’d love to have more money in our Roth IRAs but, for the time being, that’s not in the cards.

Follow me on Twitter!

---
Related Articles at fivecentnickel.com:

» Carnivals – Week of 09/03/07
» Q&A: Using IRA Funds to Purchase a Home Outside the U.S.
» Cash Out Roth IRA to Pay Off House?
» “Borrowing” Money from an IRA
» Q&A: Using IRA Funds to Pay Off a Student Loan
» Q&A: Earnest Money
» Keeping Your Business and Home Life Separate
» From the Archives (August 24th – August 30th)

If you’ve ever applied for a mortgage, you’re almost certainly familiar with a “Good Faith Estimate,” which gives you a rundown of costs associated with your mortgage. According to a recent sidebar in Money Magazine, the average costs associated with a $200,000 mortgage (excluding taxes, prepaid interest, and insurance) are $3,024 (roughly 1.5% of the loan). If you’re being asked to pay much more than that, then alarm bells should be going off in your head.

So what fees should you target when talking your mortgage broker down? Here’s a rundown of types of fees as well as average costs for each:

Just say no to the following fees…
Commitment (rate lock): $371
Application: $250

Negotiate these fees…
Origination: $779
Processing: $386
Document preparation: $291
Title work: $196

These fees are legit…
Title insurance: $663
Closing attorney: $362
Appraisal: $343
Underwriting: $201
Pest or other inspections: $60
Credit report: $22
Flood certification: $14

So… The next time you apply for a mortgage, be sure to take a close look at the Good Faith Estimate and make sure there aren’t any outlandish fees.

Follow me on Twitter!

---
Related Articles at fivecentnickel.com:

» Carnivals – Week of 09/03/07
» Refinancing Our Mortgage
» Calculating Your Mortgage Refinance Payback Period
» The Best of August 2007
» Escape Your Mortgage Due to a Bank Failure?
» What’s a Piggyback Mortgage?
» Mortgage Refinance Complete
» The Best of FCN – Selections from 04/06

Not long ago, I put together a historical graph of our net worth. In response to this look back at our financial performance over the past decade, mbhunter asked how much of the increase in our net worth was due to appreciation in home value. My response was that our first house appreciated at roughly 7%/year for the four years in which we lived in it (2002-2006; we haven’t been in our new house long enough for it to have appreciated much at all). But all of this got me to thinking…

While the value of our home increased at 7%/year, this vastly understates the performance of our home from an investment perspective. The reason for this is that we invested far less than the the cost of our home when we bought it, and we used borrowed money (i.e., a mortgage) to cover the rest. In the investing world, the use of a small initial investment combined with borrowed money to finance an investment is referred to “leverage,” and it can dramatically amplify your investment performance.

Here’s the situation:

Our house cost roughly $180,000 when we purchased it, and we sold the house after almost exactly four years for roughly $240,000.

Now for the math:

A $60,000 profit on a $180,000 purchase is a 33% increase. Compounding that out over four years, it comes to just under 7.5% per year. Of course, that’s a bit generous, as we had costs associated with selling at the back end. Factoring in a 6% commission on the selling end, we cleared $225,600 for a profit of $45,600. This is just over a 25% gain, or just under 6%/year. Not too bad, especially considering that: (1) we weren’t in an overly-hot housing market, and (2) it was a tax free gain. But wait, it gets better…

When we bought our house, we didn’t pay cash. Rather, we took out an 80% mortgage with 10% down ($18,000) and another 10% from a second mortgage. We were, however, able to kill off the second mortgage in relatively short order (i.e., within about two years). Thus, for the sake of simplicity, let’s assume that our amount invested over our time in the house averaged $27,000 ($18,000 for the first two years and $36,000 for the last two years). Let’s just call it $30,000 to account for a small amount of closing costs.

Since the alternative to buying a home would’ve been to rent, and because a suitable property would’ve cost about the same as our mortgage payment (including taxes and insurance), I’m going to simply ignore our monthly mortgage payment for the purposes of this calculation — after all, we would’ve been writing a check of that same amount every month, whether it was to a bank or a landlord.

So… We actually banked a $45,600 tax-free profit on a four year investment of (roughly) $30,000. That’s an overall gain of 152%. Compounding that out over four years, we actually earned 26% per year on our investment.

Had we put even less down on our house, the percentage returns would’ve been even higher. This is exactly why you always see late-night infomercials touting “no money down” real estate investment. The thinner you spread your money, the more leverage you’ll have, and the higher your potential returns will be. Unfortunately, this sort of leverage can really amplify your risk, as well. Buying a house for yourself is one thing, but loading up on property (or any other investment) with minimal money down is an entirely different kettle of fish.

Follow me on Twitter!

---
Related Articles at fivecentnickel.com:

» Why is Your Home the Best Investment?
» Leverage: The Secret of Making Big Money
» Home Price Forecast in 100 Top Markets
» The Three Worst Reasons to Buy a House
» From the Archives (June 24th – June 30th)
» Playing the Percentages: The Effect of Gains and Losses
» Money Moves for 2006, Part 2: Your Portfolio
» From the Archives (July 1st – July 7th)

Wow, this sucks. A couple from Slidell, LA lost their home, which had been mortgage free since 1968, over a wayward tax bill of $1.63 (plus $0.10 in interest). The couple didn’t realize they should be expecting a tax bill when this all started because their home’s value had previously been below the states $75,000 homestead exemption such that they had never had to pay property taxes. But that all changed when their home was re-assessed at $75,100 in 1996, resulting in the tiny tax bill that was then sent to a rural route address that no longer existed because it had been upgraded to a street address when the local 9-1-1 system was established. The bill was returned undelivered, and the following year their home was sold at the Sherriff’s tax sale. The good news is that, with the help of an anonymous benefactor, they just settled a lawsuit that had kept their home in legal limbo ever since snatched out from under them.

Follow me on Twitter!

---
Related Articles at fivecentnickel.com:

» Home Inspection Complete
» Overdue Medical Bill
» Income Tax Breaks in the Bailout Bill
» The Definition of Overpaid
» Automating our Finances
» Howard Stern is Underpaid
» Qualifying for an FHA Home Loan
» Carnivals – Week of 10/08/07

This article is a guest blogger submission written by KMC of Advanced Personal Finance. If you like what you see, why not subscribe to his RSS feed?

There’s an interesting wrinkle developing in the ongoing housing bubble/sub-prime saga. It looks like many large banks may be coming to the rescue of defaulting borrowers. Why would they do something like that? Because it lets them avoid huge payouts to hedge funds.

Credit Default Swaps

There’s a common derivative called a Credit Default Swap (CDS). It’s essentially an insurance property against mortgage defaults. A Mortgage Backed Security (MBS) is sold by a bank to a hedge fund (or anyone else). To hedge the exposure, the fund buys a CDS that pays off big if certain default criteria are met. Interestingly, the hedge fund doesn’t even have to own the MBS to buy the swap. Kind of like taking out a life insurance policy on someone else with you as the beneficiary.

So what we have is banks lending money per their normal business model. But because they’ve also sold CDSs, they really, really, really don’t want people to default on their mortgages. If enough do, the bank will be on the hook for serious cash.

What’s a mega-bank to do? Help out the borrower, of course. Banks are rewriting loans to borrowers at risk of defaulting in an effort to prevent the default criteria from being met.

Market manipulation or good banking practices?

Hedge funds and other purchasers of CDSs are naturally not pleased with this development. They’re arguing banks shouldn’t be able to do this to avoid paying on the swaps. The hedge funds call it market manipulation. Banks say they’re doing nothing of the kind, they’re just trying to help the little guy keep his or her home.

Hedge funds have a real problem here for precisely the same reason they normally the freedom they do – they’re very lightly regulated. There’s no governing body to make the decision on whether what the banks are doing is ok or not.

So if you read or hear about banks benevolently reworking loan terms for at-risk borrowers, now you know that they’re not doing it out of the goodness of their hearts.

But you already knew that, didn’t you?

Follow me on Twitter!

---
Related Articles at fivecentnickel.com:

» Fannie Mae and Freddie Mac Failure is Looming, Takeover Imminent
» Inside the Housing Rescue Bill
» What Happens to Your Mortgage if Your Bank Fails?
» From the Archives (December 2nd – December 8th)
» Escape Your Mortgage Due to a Bank Failure?
» How to Save Money on Homeowners Insurance
» Banks and Fraud: Bank of America Better Than Expected?
» Help a Reader: Upside Down on a Condo

This article is a guest blogger submission written by SVB of The Digerati Life. If you like what you see, why not subscribe to SVB’s RSS feed?

I knew that somewhere out there, the ideal real estate agent existed, and I found him. Is it because he can get me the best deals? It’s more than that. He tells… and sells the colorful truth.

So what do you think of these home descriptions?

In one description he warned potential customers: ‘Dear God, it’s difficult to imagine a more disgusting house than this.’

One description for a two bedrooms terraced house at £155,000 reads: ‘All the charm and poise of a vicar on crack. Hall, cloak room, sitting room, kitchen, bathroom, parking and rear courtyard garden. Suit midget on a budget.’

He chose to describe some homes as “grubby, cramped and dirty” or “suitable for the Addams Family.”

Meanwhile, an elegant cottage is advertised as: ‘An absolute stunner – if this cottage was a woman it would be Denise Van Outen in a rubber suit holding a cold flannel.’

A description for a one bedroom home reads: ‘My personal favorite. Delicious as a small bun sprinkled with sugar on the top this place fair glistens with delight. It’s smooth and silky with a contempory twist but still holds fast to an ancient value. A must see and cracking investment.’

That got my attention!

The agent behind these effusive listings is Julian Bending from Somerset, England, who has decided to avoid wasting people’s time by stating the obvious. After all, the property will speak for itself anyway at some point.

Perhaps Mr. Bending is a bit, shall we say, “extreme” about the wording in his advertisements, but I do commend him for having one attribute that I wished real estate professionals, and salespeople in general, would be more typical to possess: brutal candor. Of course, this may not be your cup of tea, but a number of people including myself do find this type of honesty refreshing in this business.

So this got me thinking about what it is I’m really looking for in a broker; my thoughts ultimately spawning this wish list:

Wanted: My Ideal Real Estate Professional

Find me someone with all these characteristics, and they’ll have my business!

» Excellent communication skills
The job involves strong interpersonal skills so communication skills that will fit your target market is important.

» Flexible about their commissions and their terms
See if you can find an agent who will negotiate with you, give you some leeway or is open to discussion. For example, you should have the right to take the property off the market for any reason, to switch brokers or cancel the agreement without penalty if you are unsatisfied with the broker’s efforts. The agreement should be in effect 90 days and should only have a six-month period where you would owe this broker a commission if someone they showed the home returns to buy it later.

» Personable and easy to get along with
Since you’re forging a business relationship with your agent, you should find someone who you like and has a great personality so that your experience with buying or selling a house is pleasant. Can you imagine what it would be like if you’re stuck with someone you’re constantly annoyed with, while steeped in the real estate process, which is aggravating enough? This would totally add to my stress level!

» A discount broker, perhaps?
A discount broker may be great for the money but may have less credibility. They may work better as a buyer’s agent since listing agents will need experience with marketing and generating traffic to a house for sale.

» Good references
Like in any other job, an agent should be able to supply references.

» Recommended by someone you already know and trust
Did someone recommend your agent? If not, make sure you interview your candidates and ask questions…Of course, interview or get to know the candidates you are considering to work with you. Be aware of the reputation of their agencies.

» Realistic and honest
Some brokers will try to get your listing by suggesting an unrealistically high price for your house. They’ll tell you every house is the best house they’ve ever seen, every room is just about perfect, your kids are going to love it, the neighbors will love your barking dog. They’ll tell you anything! An agent must disclose all the material facts of any transaction — everything they know about the property, good or bad. If a salesperson knows there are three inches of water in the basement every time it rains, he is obligated to disclose that fact.

» An expert in the neighborhoods you’re dealing with
The person representing you needs to be an expert in the kind of property you are interested in buying…or selling. Familiarity in the price range and neighborhood should be a priority. They should know your particular market, as well as the schools, taxes and local transportation. Someone with 4 or 5 years under their belt would be suitable, though folks with less experience may agree to negotiate their commissions. But as they say, you get what you pay for. I’d opt to pay for the experience.

» Professional and committed, not a fly by night
I’d prefer to consider somebody who was doing the job full time and for a long while. I do see quite a good number of people who start out as part time brokers to supplement other jobs, and recruiting their own relatives as customers. When they ask for my business, I politely tell them I have many other brokers I know who I’m considering.

» Consider choosing an agent who is a Realtor
I’d work with a realtor, as opposed to just an agent or a broker. Some key distinctions: all real estate agents need to be licensed by the state while those who also take additional tests become brokers who can run their own offices. Realtors are agents or brokers who belong to the National Association of Realtors, and pledge to subscribe to a strict Code of Ethics and Standards of Practice. Note that agents who are subscribers have access to Multiple Listing Services (MLS) (a database of all available properties that brokers use to find homes to show to buyers) through which members share listings and have access to many more properties than non-members. You can locate a Realtor in your area at www.realtor.com.

» Someone who has a good network or can provide other services
Will they help arrange a house inspection, refer you to qualified lending professionals and real estate attorneys, and conduct a study of the property’s value? Good customer service shouldn’t be too much to ask. Customer relationships are at the root of a salesperson’s career, and agents are salespeople.

Do your agent’s qualifications read like your resume? They should. After all, you’re picking someone hopefully as sharp as you are in your line of work!

In our town, we’re suffering from a real estate agent glut, or what you may call a bubble. I know way too many real estate professionals all vying for the same business: they approach the same people, the same friends and even relatives(!) as they hunt for clients. When you’re in the middle of such networks and relationships, it gets tough, like when I had to choose between two very good friends to help us buy a house. It actually turned quite ugly after we selected one of them to be our agent based on the criteria I’ve listed above. I tried to be systematic and logical, but my choices were still questioned and taken personally.

If you are armed with a good list that can help justify the broker you decide to do business with, I’m sure you’ll be one step closer to sleeping much better and feeling more comfortable about your home buying or selling decisions. You’ll approach these tasks with due diligence, despite all the subjectivity that comes along with signing up with a professional.

[Source: Estate Agent Decides Honesty Is The Best Policy]

Follow me on Twitter!

---
Related Articles at fivecentnickel.com:

» Ten Real Estate Mistakes, Part 1
» Ten Real Estate Mistakes, Part 2
» How to Sell a House in a Down Market
» Real Estate Sign of the Times
» What is a Mortgage Escrow Account?
» One Year Ago This Week (July 2nd – July 8th)
» From the Archives – (March 16th – March 22nd)
» More About Real Estate Investing

A recent search engine visitor asked:

Who gets to keep the earnest money a real estate deal falls through?

My answer: While I’ve talked in the past about the cost of a failed house deal, I’ve never really dealt directly with the issue of earnest money. In case you’re not aware, the whole point of earnest money, which a prospective buyer typically pays to the seller when they make an offer on a property, is to ensure that the buyer is serious, and intends to go through with the deal. Thus, if the buyer backs out of the deal, the seller gets to keep the earnest money. If the deal goes through, the funds are applied to the purchase at closing.

Of course, there are possible exceptions, like when the buyer makes their offer contingent on securing financing, the outcome of the home inspection, etc. But for the most part, if a deal falls through and it’s the buyer’s fault, the seller keeps the cash. Of course, the seller could also try to sue for ‘performance’ (i.e., to make the buyer honor the contract) but the most common thing to do is pocket the earnest money and put your house back on the market.

This is something to keep in mind when deciding whether or not to accept an offer on your home… If the prospective buyer offers a relatively small amount of earnest money, they might not be as serious as you had hoped. In that case it’s probably a good idea to ask for more in a counteroffer. Around here it seems that ~1% of the offer price is standard. From the seller’s perspective, more is always better (and vice versa for the buyer).

This article is part of my Money Q&A Series.

Follow me on Twitter!

---
Related Articles at fivecentnickel.com:

» Ten Days Until Closing
» From the Archives (June 1st – June 7th)
» First (Lowball) Offer Received
» Offer Made, Offer Received
» The Cost of a Failed House Deal
» Counter Offer Made, Another Offer Received
» The Best of June 2007
» The Salary Theorem

According to a recent survey of real estate agents in Money Magazine, the following renovations can actually hurt the value of your home:

(1) Swimming pools (except in hot-weather areas such as Arizona and Florida). Potential buyers will worry about safety, upkeep, and insurance.

(2) An addition that doesn’t enhance your home’s exterior. To be honest, I have a hard time seeing how this will hurt the value of your home, but I can imagine that it wouldn’t help as much

(3) Trendy hardware and appliance finishes. Trends change, and what’s popular now my be out-of-date shortly.

(4) Circular bath with massaging jets. Here again, I have a hard time seeing how this would hurt, as opposed to just failing to help your home’s value.

[Source: Money Magazine via Bottom Line/Personal]

Follow me on Twitter!

---
Related Articles at fivecentnickel.com:

» From the Archives (April 13th – May 3rd)
» Carnivals – Week of 10/08/07
» Home Renovation Progress (and Property Tax Assessment)
» Staging Your Home for Sale
» Home Addition Update: Drywall Dust, Dust, and More Dust
» Our Home Renovations: The Beginning
» From the Archives (July 8th – July 14th)
» Busy Schedules: Money Saver or Money Waster