Three Reasons Why Sellers Should Consider Seller-Paid Points

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"Seller-paid points" are where you pay points to reduce the interest rate on the buyer's mortgage.  One point = 1% of the loan amount paid upfront to the buyer's mortgage lender at the closing, in exchange for a lower interest rate on the buyer's mortgage.

Consider a home where the list price is $300,000 and you are willing to accept a bottom line of $291,000.  You would need reduce the price by $9,000. However, what if you take that $9,000 and apply it toward paying points on the buyer's mortgage instead of reducing your list price?  You'd still walk away with a net of $291,000.  However, there are three extra benefits to you in this scenario.

#1 - Your House Becomes More Affordable to a Wider Pool of Buyers

Paying points on behalf of the buyer can have almost 3 times the impact on the buyer's purchasing power vs. reducing your list price.  This is because most buyers use mortgage financing.  The buyer's mortgage interest rate would likely be 0.5% - 0.75% lower if you use the $9,000 to pay points on his/her behalf.  In our example, you'd have to reduce the price of your $300,000 home to approx. $280,000 in order to achieve the same monthly payment for the buyer.  This means your $9,000 in seller-paid points would end up having a $20,000 impact on the buyer's purchasing power and make your home more affordable to a wider pool of buyers.

#2 - You Reduce Your Risk of the Deal Falling Through

If you pay points on the behalf of the buyer, the buyer would walk away with:

• A lower APR on his/her mortgage; and,
• A lower debt-to-income (DTI) ratio because of the lower monthly payments

These two things make it easier for the buyer to qualify for a mortgage. The benefit to you is that you have less risk of the deal falling through because you're making it easier for the buyer to qualify for financing.

Four Questions to Ask Before Choosing a Mortgage or Buying a Home

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These four questions can help you make smarter mortgage and housing choices:

1. Why is it better to buy a home right now vs. renting a home?  Buying a home usually requires more upfront capital, more ongoing expenses and a longer term commitment.  Make sure to run the numbers with a certified professional to evaluate whether you'd be better off buying vs. renting.
2. How can I make sure this fits into my short-term and long-term budget?  Make sure to strategize with a certified professional and compare your options when it comes to:
   • Choosing a down payment amount and strategy
   • Choosing a monthly payment scenario
   • Choosing a price range for your new home
3. How will this financial decision impact other areas of my life?  Make sure to think through how your cash flow situation will impact:
   • Children’s college funding
   • Retirement planning
   • Taking care of elderly parents
   • Other large financial purchases or commitments
4. What mortgage and home buying strategy will result in less overall financial risk? The mortgage is most likely going to be your single-largest debt; and your home is most likely going to be your single largest investment. That’s why it's important to evaluate and compare your options with a Certified Mortgage Planning Specialist.

Contact me so we can get started!

How to Solve Your Negative Equity Problem, and Increase ROI

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One out of every ten homeowners in America owe more on their mortgages than the value of their homes. You may want to consider the "cash-in mortgage" strategy if you're in that situation. You can use this strategy to reduce your mortgage in order to refinance your loan into a lower payment.  You can also use the strategy to sell the property without having to do a short sale.

Cash-in Mortgage Refinance

Using cash to pay down your mortgage may allow you to refinance into a lower interest rate and lower your monthly payments. For example, consider a homeowner who owns a $200,000 home that has declined in value to $150,000. The picture illustrates what would happen if the homeowner uses $60,000 in cash to reduce the balance of their $180,000 mortgage to $120,000.  As you can see, this would result in extra cash flow of $623 per month.  There are two steps to determine the financial impact of this strategy:

• Step 1: $623 monthly savings x 12 = $7,476 annual savings
• Step 2: $7,476 annual savings / $60,000 investment = 12.46% Cash on Cash ROI

How would you like to earn 12.46% tax-free (and risk-free) rate of return on your $60,000 investment?
This strategy makes sense as long as you are currently earning less than 12.46% after-tax on your $60,000. There are two ways to get the $60,000 in cash to make this strategy work:

• You can use cash from your bank accounts that may be currently earning you 0% or 1% interest; and/or,
• You could sell some of your other investment assets that are earning you less than 12.46% after-tax.

Either way, the strategy makes sense as long as you can earn a higher after-tax return on your money by paying down your mortgage than you would by leaving your cash wherever it is right now.

Cash-in Mortgage to Sell Your House

The cash-in mortgage strategy can be used to eliminate negative equity and sell your home without pursuing the short sale option. For example, consider a homeowner who owns a $200,000 home that has declined in value to $150,000. If the homeowner rents out the property, they would end up with negative cash flow of $400/month. Here's what would happen if the homeowner sold the house for $150,000 by using $42,000 in cash to reduce the balance of their $180,000 mortgage to $138,000:

Again, there are two steps to determine the financial impact of this strategy:

• Step 1: $400 monthly savings x 12 = $4,800 annual savings
• Step 2: $4,800 annual savings / $42,000 investment = 11.42% Cash on Cash ROI

This strategy makes sense as long as you are currently earning less than 11.24% after-tax on your $42,000. There are two ways to get the $42,000 in cash to make this strategy work:

• You can use cash from your bank accounts that may be currently earning you 0% or 1% interest; and/or,
• You could sell some of your other investment assets that are earning you less than 11.42% after-tax.

Either way, the strategy makes sense as long as you can earn a higher after-tax return on your money by paying down your mortgage and selling your home than you would by leaving your cash wherever it is right now. There are two additional benefits with this strategy:

• You eliminate the headache and need to manage tenants if you rent out the property; and,
• You protect your credit rating from any adverse impact that may occur from pursuing the short sale or foreclosure option.

Conclusion

It's always advisable to consult with a Certified Mortgage Planning Specialist (CMPS®) when navigating today's turbulent mortgage and real estate marketplace. I'd be happy to review your situation and help you compare your options.  Contact me for more information!

Three Things You Should Know About Pulling Cash-out For Home Improvement

There are three tax rules you should know about when you're considering a cash-out refinance to fund home improvements:

1. In order to deduct the interest on the mortgage as acquisition indebtedness, the IRS requires the project to be a "Substantial Improvement" that:
   1. Adds to the value of the home
   2. Prolongs the home’s useful life, or
   3. Adapts the home to new uses.  For example, painting a room may not qualify, but an addition or new kitchen may qualify.
2. You Have a 24-Month Look-Back Period. If you are pulling cash out to reimburse yourself for improvements already made, those improvements must have occurred within the past 24-months in order to qualify for the acquisition indebtedness deduction.
3. You Have a 12-Month Look-Forward Period. If you are pulling cash out in order to make future home improvements, you'll need to complete the home improvements within the next 12-months in order to qualify for the acquisition indebtedness deduction.  

In all these cases, you'll need to show receipts in case of an audit.  PLEASE NOTE: THIS ARTICLE AND OVERVIEW IS PROVIDED FOR INFORMATIONAL PURPOSES ONLY AND DOES NOT CONSTITUTE LEGAL, TAX, OR FINANCIAL ADVICE. PLEASE CONSULT WITH A QUALIFIED TAX ADVISOR FOR SPECIFIC ADVICE PERTAINING TO YOUR SITUATION. FOR MORE INFORMATION ON ANY OF THESE ITEMS, PLEASE REFERENCE IRS PUBLICATION 936.

Five Things to Consider Before Buying a Home

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Here are five of the most common risks associated with buying a home:

1. House price risk (up or down): what if the house goes down in value?  That's why it's important to evaluate mortgage, cash flow and debt planning strategies that won't put you in a bind if house prices stagnate or go down a little bit.  On the other hand, what if the house goes up in value and you haven’t pulled the trigger yet?  That's why it's important to get yourself a solid mortgage approval BEFORE you go house shopping, and be prepared to act quickly if you find what you're looking for.
2. High costs of sale (8% +): do you realize that you’d have to sell the house for at least 8% - 10% more than what you paid for it just to break even and cover the real estate commissions and transfer taxes?  That's why it's important to make sure that buying this home is part of a longer-term strategy.
3. Improvements, Utilities & Maintenance Costs: have you considered the costs of improvements, utilities and ongoing maintenance expenses?  That's why it's important to:
   • Get your home properly inspected before the closing
   • Investigate the cost of utilities, and make sure to budget for them
   • Budget 1%-2% of the home's value for annual maintenance expenses
4. Opportunity cost: what rate of return could you have earned in a different investment with the funds you are spending on your down payment?  That's why it's important to perform a buy vs. rent analysis and run the numbers for your specific situation.
   
   
5. Long-term Commitment + Changing Cash Flow Needs: how does this decision impact your family’s college funding, retirement planning or elder care funding strategy?  That's why it's important to consider mortgage strategies that take into account your changing cash flow needs.

The mortgage is most likely going to be your single-largest debt; and your home is most likely going to be your single largest investment. That’s why it's important to work with a qualified real estate professional and a Certified Mortgage Planning Specialist.  Together, we can help you consider these risks and compare your options. Contact me so we can get started!

Top Cities for First-Time Buyers in 2016

from the Daily Real Estate News | Wednesday, December 30, 2015    

More first-time home buyers are expected to enter the market in the new year, but which areas of the country will they likely be most attracted to?


Money Source, a nationwide correspondent lender, recently reviewed more than 70,000 loan applications and city-specific median home prices, unemployment rates, and quality of life to uncover the top places for first-time homebuying in the new year.


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