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Standard or Itemized Deductions

by The Mike Parker Team

The Tax Cuts and Jobs Act of 2017 increased the standard deduction to $24,000 for married couples.  There will be some instances that homeowners may be better off taking the standard deduction than itemizing their deductions.  In the past, homeowners would most likely be better off itemizing but the $10,000 limit of state and local taxes (SALT) adds one more issue to consider.

Let's look at a hypothetical homeowner to see how a strategy that has been around for years could benefit them now even though they haven't used it in the past.  The strategy is called bunching; by timing the payments in a tax year so that they can be combined to make a larger deduction.

Let's say that the married couple filing jointly has a $285,000 mortgage at 5% for 30 years that has about $14,000 in interest being paid.  The property taxes are $6,000 and they have $4,000 a year in charitable contributions for a total of $24,000 of allowable itemized deductions on Schedule A.

Standard Itemized.jpg

Since that deduction amount is the same as the Standard Deduction, there is no monetary advantage one way or the other.  However, if the taxpayers were to pay their interest because they must make timely house payments but only pay $2,000 of the 2018 property taxes in December of 2018 and the balance of the $4,000 in January, they transfer part of the deduction into 2019.

Additionally, if they make their intended charitable contribution for 2018 in January of 2019, it makes that deductible on the 2019 return.

Since the total deductible amounts paid out in 2018 was $16,000, the taxpayers would have an $8,000 benefit that year from taking the Standard Deduction. 

Assuming they made the same $4,000 charitable contribution in 2019 during the year and paid the house payment and property taxes on time, their total deductions for 2019 would be $32,000 which is $8,000 more than the Standard Deduction.

In this example, the taxpayers in 2018 and 2019, would benefit a total of $16,000 in tax deductions by bunching and electing to take the standard deduction one year and itemizing the next. 

This is only an example but if your situation is similar, it might benefit you to consider an alternative when to take the standard deduction and when to itemize.  This is a conversation you need to have with your tax professional to see if it would work for you.

Eliminate FHA Mortgage Insurance

by The Mike Parker Team

Mortgage insurance premium can add almost $200 to the payment on a $265,000 FHA mortgage.  The decision to get an FHA loan may have been the lower down payment requirement or the lower credit score levels, but now that you have the loan, is it possible to eliminate it?

Mortgage Insurance Premium protects lenders in case of a borrower's default and is required on FHA loans.  The Up-Front MIP is currently 1.75% of the base loan amount and paid at the time of closing.  Annual MIP for loans with greater than 95% loan-to-value is .85% per year.  

For loans with FHA case numbers assigned before June 3, 2013, when the loan is paid down to 78% of the original loan amount, the MIP can be cancelled.  The borrower may need to contact the current servicer.

However, for loans greater than 90% with FHA case numbers assigned on or after that date, the MIP is required for the term of the loan.

Most homeowners with FHA mortgages are not eligible to cancel the MIP because they either originated their loan after June 3, 2013, put less than 10% down payment and/or got a 30-year loan.  If they have at least 20% equity in the home, they can refinance the home with an 80% conventional loan which in most cases, does not require mortgage insurance.

With normal amortization on a 30-year loan, it takes approximately 11-years to reduce the original loan to the 78-80% requirement based on normal amortization.  There is another dynamic involved which is the appreciation on the home.  As the home goes up in value and the unpaid balance goes down, the equity increases.

If the homeowners believe that they have enough equity that would eliminate the need for mortgage insurance, they can investigate refinancing with a conventional loan.  Borrowers refinancing will incur expenses in starting a new mortgage and the interest rate may be higher than the existing rate.  Analysis will determine how long it will take to recapture the cost of refinancing. 

Call me as (859) 647-0700 for a recommendation of a trusted mortgage professional.

Your Real Estate Resource

by The Mike Parker Team

Being a better homeowner is a full-time job.  It's not just about making better decisions when you buy and sell; it's making better decisions throughout the time you own the home.

It takes good information to make good decisions.  Think of times when you need advice on financing, taxes, insurance, maintenance, finding reasonable and reliable contractors and lots of other things.  Imagine how nice it would be to have a real estate information line you could call whenever you have a question.

During the purchase or sale, the obvious place to get real estate answers is your agent but where do you go the rest of the time? Since homeowners are now staying in their homes for ten to twelve years or more, they need a reliable resource for good information and advice.

Our objective is to move from a single purchase or sale to customers for life; a select group of our friends and past customers who consider us their lifelong real estate professional.   We believe that if we help you and your friends with all their real estate needs not just when they buy or sell but for all the years in between, we can earn the privilege to be your real estate professional.

Throughout the year, we'll send reminders and suggestions by email and social media that enhance your homeowner experience.  When we find good articles to help you be a better homeowner, we'll pass them along.  You'll discover new ways to maintain your property, minimize expenses and manage debt and risk. 

We want to be your "Go-To" person for everything to do with real estate.  If you have a question, please call us at (859) 647-0700.  If we don't have the answer, we'll find it for you or at least, point you in the right direction.

We're here for you and your friends...now and in the future.  Please let us know how we can help you.

More Comfortable, Convenient, and Secure

by The Mike Parker Team

Smart home technology promises to make your home more comfortable, convenient and secure.  It may not be the home from the Jetson's but artificial intelligence is the hope to make it the home of the future which is available now and controlled from anywhere you have an Internet connection.

When Alexa appeared at Christmas-time two years ago, most people thought it was a novelty to ask what the weather will be or to play a song.  Few people understood the vision of Amazon would be verbally purchasing everything imaginable and that your calendar, contacts, lights, and appliances would all be connected.

There are plenty of players in the market including Amazon Alexa, Google Assistant, Samsung Smart Things, Apple and others.  It starts with a hub that acts like a brain for your system to connect the different home automation devices.  You'll establish an online account with the hub manufacturer so that you can adjust settings and controls.

You could start simple with switch and plug receptacles that would allow you to control lights either vocally through your hub or from your Smartphone or tablet anywhere in the world where you have an Internet connection.

Programmable thermostats can lower your monthly utility costs while conveniently regulating your comfort by adjusting temperatures on your heating and cooling systems.  These can be particularly effective in homes with zoned systems where you might live in one area during the day but sleep in a different zone.

Door bells might be one of the next additions to your automation.  Not only can you communicate with the person at your door, you don't have to go to the door to do it.  The device cameras are motion activated so you'll see who is there regardless of whether they rang the doorbell or not.

Door locks can be convenient because instead of giving someone a key, you can issue a temporary code to let them enter.  You can give them permanent access and rescind it any time you want without having to change the locks.  You'll know when they enter and leave your home.

Other security options can include door and window sensors, motion detectors and cameras for outside or inside the home.  The homeowner will be able to monitor from inside or anywhere else they have an Internet connection.

Smoke and carbon monoxide detectors, as well as water sensors to determine leaking water around water heaters or in basements give homeowners peace of mind.

Most of these devices are available in wireless models so you won't have to string wire throughout the home.  The Wi-Fi can introduce a potential problem of hackers who could illegally access your system.  This is true with any home that has a Wi-Fi router and precautions should be taken.

The big box stores like LowesHome Depot, and Amazon offer a wide variety of brands and modules.  Many people prefer it as a do-it-yourself project and others would rather have a professional do it for them.  YouTube has a lot of videos that can probably show you exactly how to install the ones you select.

Another Type of Financing Concession

by The Mike Parker Team

Price, condition and terms are factors that any owner must consider when marketing their home.  Price is usually the easiest to adjust to compensate for shortcomings in location or condition of the home.  Improving the condition of the property is more time consuming but updates to kitchens, baths and other things can appeal to a buyer.

One of the most overlooked marketing factors are terms which are also referred to as financing concessions.

Paying part or all a buyer's closing costs is the most common financing concession.  By doing so, the buyer doesn't need as much cash to get into the home which can be attractive to more buyers. 

There is another financing concession that is not used very often in today's market but it is still allowed and can increase the marketability of a home. A temporary buy-down of the interest rate makes a lower payment for an initial period.

It is still a fixed-rate mortgage that the buyer must qualify for at the note rate and there is no negative amortization.  The seller pre-pays the interest in advance at closing so the buyer has lower payments in the initial period.

Instead of lowering the price of the home, let's say the seller has decided to offer $6,875 worth of financing concessions that the buyer can apply any way they want.  One way might be to get a 2/1 buy-down which means that the first year, the payment would be based on 2% less than the note rate of the mortgage and the second year, it would be 1% less than the note rate.  The third through thirtieth years, the payment would be the actual note rate.

On a $275,000 home with a 3.5% down payment at 5% for 30 years, the first year's mortgage payment would be figured at 3% which would be $305.76 less than normal.  The second year's payment would be figured at 4% and would be $157.65 less than normal.  The third through thirtieth years, the payment would be the normal payment of $1,424.59.

Financing Concessions.png

It would save the buyer $5,560.90 in interest in the first two years and there would still be $1,314 of the financing concession to apply toward the buyer's closing costs.

The financing concessions paid by the seller give the buyer lower payments for the first two years and less money needed for the closing cost.  An added bonus for the buyer is that the buyer can deduct the pre-paid interest the seller paid as qualified mortgage interest.

Some lenders may tell you that temporary buy downs cannot be done.  They've been around for over thirty years and can still be done today on FHA, VA and conventional loans.  Call (859) 647-0700 if you need a recommendation of a trusted mortgage professional or check out a 2/1 Buydown with your own numbers.

44 Times More Than a Renter

by The Mike Parker Team

 

The Federal Reserve Board's Triennial Survey of Consumer Finances recently revealed the net worth of a homeowner was $231,400 compared to $5,200 for a renter.  The net worth of homeowners increased 15% from 2013 to 2016 while renters' decreased by 5%.

Appreciation and principal reduction are the two dynamics that affect a homeowner's equity.  Each payment is applied to the interest for the previous month and the principal reduction to retire the mortgage.

A $300,000 home purchased with a $294,566 FHA mortgage at 5% for 30 years has an average monthly principal reduction $362 in the first year. Two percent appreciation would benefit the buyer by $500 a month.  In this example, the equity grows by $860 a month for the homeowner.  A tenant would have to invest $660 a month over and above the rent they're paying.

Based on the assumptions listed above, the $10,500 down payment would become approximately $85,000 of equity in seven years.Leverage and forced savings contribute to the difference in addition to the appreciation and principal reduction.

The rent paid by tenants help the landlord recoup their investment in the home and a return on their investment.  Some people say, regardless if a person rents or buys, they pay for the house they occupy.  The choice is whether to buy it for themselves or their landlord.

Check out some of the benefits using your own numbers with this fill-in-the blank Rent vs. Own.

Gift of Equity

by The Mike Parker Team

There is a little-known mortgage program that could provide the vehicle for the right person to get into a home.  If a person sells their home to another for less than the fair market value, the difference in the appraised value and the sales price is considered a gift of equity for the buyer.

FHA requires that borrowers receive gifts of equity only from family members transferring title to the borrower. 

An appraisal is required to determine the value of the home.  The sales price is subtracted from the appraised value to determine the equity to be gifted.  If a home appraises for $300,000 when the owner will sell it for $250,000, the gift is $50,000.

The gift is applied to the down payment.  In this example, the borrower would have to qualify for a $250,000 mortgage which would require private mortgage insurance because a 20% down payment on a $300,000 home would be $60,000.  If the buyer had an additional $10,000 in cash to put down, the PMI would not be required, and the monthly payments would be lower.

The seller would need to provide a gift letter stating the amount of the gift, the date the gift, and that no repayment is expected or required.  It also needs to have the donor's name, address, phone, email and relationship to the buyer.  In addition, the settlement statement will need to show the gift being credited from the seller to the buyer.  The lender may require additional documentation.

Beginning in 2018, the annual gift tax exemption is increased to $15,000 per person per year and lifetime exemption to $5.6 million.  The fact that the $50,000 exceeds the individual amount doesn't mean there will necessarily be any gift tax due now.  The seller should consult their tax professional.

Do You Know the Way?

by The Mike Parker Team

It may be natural for first-time buyers to be unsure of the process of buying a home because they haven't been through it before but even repeat buyers need to know changes that have taken place since the financial housing crisis.

The steps in the home buying process are predictable and generally follow the same pattern.  It certainly makes the move stay on schedule when you know all the different things that must be done to get to the closing.

  • In the initial interview with your real estate professional, you share the things you want and need in a home, discuss available financing and learn how your agent can represent you in the transaction.
  • The pre-approval step is essential for anyone using a mortgage to purchase a home to assure that they're looking at the right price of homes and so they'll know what they can qualify for and what the interest will be.
  • Even with lower than normal inventory, it is difficult to stay up-to-date with the homes currently for sale and the new one just coming on the market.  Technology has simplified this process, but the buyer needs to implement them.
  • Showings can be accommodated online through virtual tours, drive-bys and finally, a personal tour through the home.  Your real estate professional can work with you to see all the homes in the market through REALTORS?, builders or for sale by owners.
  • When a home has been identified, an offer is written and negotiation over price, condition and terms takes place.
  • A contract is a fully negotiated, written agreement.
  • Escrow is opened to deposit the earnest money from the buyer as a sign they're acting in good faith.  The title search is also started so that clear title can be conveyed from the seller to the buyer and that the lender will have a valid lien on the property.
  • 88% of home sales involve a mortgage.  The lender will require an appraisal to be sure that the home can serve as partial collateral for the loan.  If the buyer has been pre-approved, the verifications will be updated to be certain that they're still valid.  The entire loan package when completed, is sent to underwriting for final approval.
  • When the contract is completed, at the same time the title search and mortgage approval is being worked on, the buyer will arrange for any inspections that were called for in the contract.
  • After all contingencies have been completed, the transaction goes to settlement where all of the necessary papers are signed, and the balance of the buyer's money is paid.  This is where title transfers from the seller to the buyer.
  • Possession occurs according to the sales contract.

One of the responsibilities of your real estate professional is to make sure that things are done in a timely manner so that the transaction will close according to the agreement on time and without unforeseen or unnecessary problems.

Even if you're not ready to buy or start looking yet, you need to be assembling your team of professionals.  Let us know and we'll send you our recommendations, so you can read about them on their websites.

If you have any questions, call us at (859) 647-0700; we're happy to help.  Informed buyers lead to satisfied homeowners and that is better for everyone involved.

Roll the Repairs into the Mortgage

by The Mike Parker Team

 

It's been said that if you can find a home that has most of what you want, you should go ahead and purchase it.  Many first-time buyers are using everything they have for a down payment and closing costs and would have to "live" with the less than perfect home until they can save the money to make the changes.

The FHA 203(k) mortgage allows a borrower to purchase a home and provides additional funds for improvements to be made.  These types of renovations can include kitchen and bathroom remodels, flooring, plumbing, heating and air conditioning systems, additions and other things.

The benefit to the buyer is that they have the opportunity to consider a home that needs repairs and might have been unacceptable without a program like this.  Being a FHA loan, a minimal down payment is required, fair interest rates and generous qualifying requirements.

The 203(k) Streamline can be used for cosmetic improvements, appliances and minor remodeling up to $35,000 in cost.

As you can imagine, this is a specialized program and not all lenders choose to make 203(k) loans.  They usually take longer to process and getting firm bids on the work to be done will be required.  It is important to find out how much experience a lender has with this particular type of loan.    

It will also be required that you work with a 203(k) consultant in addition to the mortgage officer.

For more information, go to Hud.gov.  FNMA has a similar conventional loan program called HomeStyle Mortgage.  Your real estate professional will be able to help with recommendations.  Call me at (859) 647-0700.

Getting the "Right" Home

by The Mike Parker Team

Finding the right home is still the biggest challenge buyers are faced with in today's market as is shown in the latest Confidence Index Survey.  Assuming the buyers find the "right" home with determination, perseverance and the help of a real estate professional, 88% of all transactions last year required financing to get the buyer's address on the home.  93% of first-time buyers needed financing.

Pre-approval is an essential step that needs to be handled before buyers begin searching for a home.  The benefits to the buyer fall into the category of confidence.

PRE-APPROVAL GIVES YOU CONFIDENCE

  • Knowing the amount you can borrow  
    the mortgage amount decreases as interest rates rise
  • Looking at the right priced homes
    price, size, amenities, location
  • Comparing and identifying the best loan
    rate, term, type
  • Uncover issues early that could affect the most favorable loan terms
    time to cure possible problems
  • Bargaining power to negotiate with the seller and possibly, competing buyers
    price, terms, & timing
  • Settlement can occur sooner after contact is accepted
    verifications have already been made

Items Needed for Pre-Approval

  • Photo ID
  • Two months current pay stubs
  • Last two year's W2s
  • Complete copies of checking and savings statements for last three months
  • Copies of statements for IRAs, 401k, savings, CDs, money market funds, etc.
  • Employment history for last two years with addresses and contacts
  • Proof of commissioned or bonus income
  • Residency history for last two years with addresses and contacts
  • Assets for down payment, closing costs, and reserves; must provide paper trail
  • If self-employed, last two years tax returns, current profit and loss statement and balance sheet; copy of partnership/corporate tax returns for last two years if owning more than 25% of company
  • FHA requires driver's license and social security card
  • VA requires original certificate of eligibility and DD214
  • Other things may be required such as previous bankruptcy, divorce decree

Contact us at (859) 647-0700 or Mike@MikeParker.com if you'd like a recommendation of a trusted mortgage professional.

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Photo of Mike Parker - CRS Real Estate
Mike Parker - CRS
HUFF Realty
60 Cavalier Blvd.
Florence KY 41042
859-647-0700