Feed: Tom Tousignant - AggScore: 80.5

General Rules for the Home Buyer Tax Credit:

• A “first time home buyer” is defined as someone who has not owned a primary home in the last three years. If you are a “first-time home buyer”, your tax credit will amount to 10% of the purchase price of your new home not to exceed $8,000.
• A “long-time resident” is defined as someone who has lived in the same primary home for 5 out of the past 8 years. If you are a “long-time resident”, your tax credit will amount to 10% of the purchase price of your new home not to exceed $6,500.
• The tax credit does not need to be paid back if you continue living in the home as your primary residence for three years without selling it
• The home must be purchased for less than $800,000 before May 1, 2010. If you sign a binding contract to purchase a home before May 1st, you would need to close on the transaction before July 1, 2010.
• Single taxpayers with incomes up to $125,000 and married couples with incomes up to $225,000 qualify for the full tax credit
• You cannot purchase the home from a related party like a spouse, direct ancestor, or direct lineal descendent (child or grandchild); however, you can still qualify for the credit if you purchase a property from siblings, nephews, nieces, and others
• If you are married, both spouses must qualify for the credit
• If more than one unmarried individual is buying the property, the credit can be split up among all the individuals who qualify. However, the total credit taken cannot exceed $8,000 (or $6,500 for “long-time residents”). Alternatively, if only one of the unmarried buyers qualifies for the credit based on their income or past home ownership status, the individual who qualifies for the credit can claim the full credit.
• The credit applies even if you have co-signers on your mortgage loan
• The credit applies to 1-4 unit homes as long as you live in one of the units as your primary residence – you could live in one unit and rent out the others

How does the tax credit work?

A tax credit is kind of like a gift certificate that you can use to pay your taxes – it reduces your income tax bill on a dollar for dollar basis. Imagine paying your bill at IRS Restaurant, and then later getting an IRS Restaurant gift certificate. Normally, you would need to go back to IRS Restaurant and buy more food in order to use your new gift certificate. But what if IRS Restaurant allowed you to just turn in your gift certificate for cash? That’s how the home buyer tax credit works! All you need to do is file a form with the IRS after you buy your new home and they will send you a refund check for $8,000 (or $6,500) – just like the example of IRS Restaurant that allows you to exchange your gift certificate for cash! Remember though, you’ll receive the $8,000 (or $6,500) from the IRS AFTER you purchase your new home, so you cannot use the funds to help with your down payment.

APR is an acronym for Annual Percentage Rate.  It’s a government-mandated calculation meant to simplify the comparison of mortgage options.  It is probably the most misunderstood number at any closing or with any application.

A loan’s APR can always be found in the top-left corner of the Federal Truth-In-Lending Disclosure.

Because APR is expressed as a percentage, many people confuse it for the loan’s interest rate.  It’s not.  APR represents an estimate of the total cost of borrowing over the life of a loan.  “Interest rate” is the basis for monthly mortgage repayments.  APR has nothing to do with your payment.

The concept of the APR is to allows consumers to make an “apples-to-apples” comparison between loan products.

As an example, a 5.000 percent mortgage with origination points and fees will almost certainly have a higher APR than a 5.500 percent mortgage with zero fees.  In this sense, APR can help a borrower determine which loan is least costly long-term.

However, APR is not without its shortcomings.

First, different banks includes different fees into their APR calculations.  By definition, this spoils APR as a choose-between-lenders, apples-to-apples comparison method.

And, second, when calculating APR, “life of the loan” is assumed to be full-term.  When a 30-year mortgage pays off in 7 years or fewer — as most of them do — APR comparisons are rendered moot.  For Adjustable Rate Mortgages, or ARM’s, the APR has to make an assumption as to what rates will do after they adjust – an impossible task that makes APR virtually useless to compare ARM loans.

In other words, APR is just one metric to compare mortgages — it’s not the only metric.  The best way to compare your mortgage options is to review all the loan terms together and determine which is most suitable.  We do this with the Total Cost Analysis report.  The Total cost is simply the sum of the interest you will pay plus the closing costs you pay for a particular loan program.  We give all of our clients a Total Cost Report when they are looking at loan options. In fact, we can even plug in ompeting offers into our software and show the Total Cost of a competitors program.

If your Lender can’t help you calculate the Total Cost of a loan choice, ask some tough question – they are telling you that they can’t tell you the cost of the product they are selling.  Yikes! Do you really want to buy that?

Mortgage markets improved last week as foreign buyers of mortgage debt helped to push mortgage rates to a 4-week low. The strength of the Stock Market and higher commodity prices should have pushed mortgage interest rates higher, but the bond market refused to play by old rules.

It marked the 3rd consecutive week that rates improved, breathing extra life into this year’s ongoing Refi Boom.

Fixed-rate, conforming mortgage rates fell about 0.125 percent on the week. ARMs did about the same.

There wasn’t much data to move mortgage rates last week; investors worked mostly on momentum and trends. However, the Friday University of Michigan Consumer Sentiment survey release garnered some attention.

After worsening in August and September, consumer sentiment fell for the third straight month in October.  Analysts worry about what it could mean to the economy.  Holiday Shopping season is here and consumer spending fuels the economy.  If households hold the purse strings tight, our nation’s budding economic recovery may stall.

Consumer Sentiment

In a scenario like that, employment rates won’t rebound so fast, but rate shoppers might not mind.  Slower-than-expected economic growth tends to suppress mortgage rates, helping to improve home affordability overall.

This week, data comes back into focus.

October’s Retail Sales report came out on Monday.  The report was better than expected, until you take out the auto sales, with Cash 4 Clunkers still impacting that number.  Mortgage rates in Charlotte improved Monday, even as the stock market improved.

On Tuesday and Wednesday, look for PPI and CPI — two key inflation indices.  Inflation causes mortgage rates to rise so if either of these reports comes in hotter-than-expected, rates will almost certainly rise.

And, lastly, also on Wednesday, we’ll get the Housing Starts report for October.  Don’t expect the markets to move on this one, but keep an eye on the data anyway.  Housing markets remain crucial to economic recovery.

Despite rates hovering near recent lows, remember that markets change quickly.  A rate quote from the morning is rarely valid by the afternoon and, when rates rise, rates rise fast.  We are now seeing the low rates again we saw for a few hours on October 5th.  When rates turn around, they tend to shoot up, but fall slowly.  I think we are near the end of the slow fall.

On Nov 6th, the President signed an extension of the First Time Home Buyer’s $8,000 tax credit and added a new benefit – a $6500 Tax Credit for homeowners that are buying a new primary residence between Nov 6th and May 1st.

Here are the highlights of the $8,000 tax credit for first time buyers:

• Who:  Someone who has not owned a principal residence during the three-year period prior to the purchase, who earns less than:

-From Jan 1, 2009 through Nov 5th, 2009:  $75,000 Filing Single or $150,000 Married, Filing Jointly
-After Jan 6th, the income limits are increased to $125,000 Filing Single or $225,000 Married, Filing Jointly

• How Much:   The tax credit is equal to 10 percent of the home’s purchase price up to a maximum of $8,000.  The tax credit applies only to homes priced at $800,000 or less.

• When: The closing of the sale has to occur between January 1, 2009 and June 30, 2010, however, a binding purchase contract has to be signed by April 30th, 2010
• How:  Add IRS form 5405 to your tax return.  You can file an amended return, or wait until next spring when you regularly file.
• Why:  Great question.  Congress has decided that this tax credit will help stabilize home prices. Since you will probably put the money to better use than the government, you may as well take advantage of it.

So, this extension takes the heat off a lot of home buyers who were nervous about closing by November 30th.  but what about those people who are still renting and not sure if they should buy?  I wrote a blog post about that a few months ago, titled “Young Couple Should Rent“.

New $6500 Tax Credit for homeowners that are buying a new primary residence

This tax credit is virtually the same as the First Time Homebuyer Tax Credit, except:

• It’s only $6,500 of free money
• You have to have lived in your previous house for 5 of the previous 8 years.  You have to have been in the same house for 5 of 8 years, not just been a homeowner for 5 of 8 years.

Members of the Armed Forces, military intelligence and Foreign Service who are on extended overseas duty or who have been on active duty for more than 90 days in 2008 and 2009 have another year to use the tax credit (through June, 30, 2011)

Don’t forget another $1500 in the Energy tax credit, so when you get into your new house, look at the list of items here that also qualify for the Energy tax credit.  With this, a home buyer can increase the tax incentives for buying a home to $9,500 for first timers, or $8,000 total for previous home owners who move.

Visit the IRS Website for the latest information.  It’s interesting that earlier this year, Congress was considering eliminating the home mortgage tax deduction and now they have decided that tax credits for home buying makes more sense.

Will this extension of the tax credit or the new tax credit make you want to buy a home?

This video shows the Rent vs. Own comparison we customize for our clients to help them make a better choice.  We all make decisions emotionally, but I feel out best decisions are backed up by the numbers.

If you would like to get a complimentary analysis like this for your specific scenario, just send me an email to get started.

Most every financial adviser, financial book, or financial ‘guru’ will suggest that you need an emergency fund.  I agree with that, in fact, I place that as the highest priority in my StartwiththeHouse system.

Where a lot of people fall short is determining how much should be in an emergency fund and where should that money be kept.  It takes a few minutes, but there is a really simple way to determine how much needs to be in an emergency fund.

1. Determine how much you currently spend each month.
2. Decide how many months you could possibly go without income.
3. Find a place to put the money.

1.  Determine how much you currently spend each month.  The fastest way to do this is to take the latest copy of your active bank statements and credit card statements.  Add up the totals of all your checking account withdrawals and credit card charges over a 30 day period.  Subtract from this number any transfers of funds, for example, if you moved some money from checking account to your savings account, don’t count that as part of your monthly spending.  Think for a minute of any annual expenses you have, such as insurance or property taxes.  Divide that number by 12months, to get the average per month for those annual bills.  Add this to your monthly total.  This number (Checks written, debit card and credit card charges plus monthly portion of annual bills) is your average monthly expenses.  If everything stopped coming in, this number is what you currently have going out each month.

2.  Decide how many months you could possibly go without income.  This number changes over time and is different for everyone.  If you are in a highly specialised job, you might expect a longer income loss after a layoff.  For many people, they could lose their job, and then be earning money doing something else in just a few weeks.

Your employment and income type also impact your emergency cash needs.  For example, a federal government employee is less likely to suffer a layoff for loss of income than a new business owner.  If you are in an industry that has frequent layoffs or is under duress right now (like airlines or automobiles), you will want to have a larger emergency fund. Your employment and income type could add 2-6 months more to your requirements.  (If you lost your job and would need a long time to find a new one, you need more emergency cash, for example).

Other factors to consider are: Age, current compensation structure, and income uniqueness.  Younger folks generally don’t require as large an emergency fund as older folks.  For example, a 23 year old college graduate still remembers how to cook ramen noodles, could probably stay with a friend, and if they have kids, really only need diapers and PBS television.  As you get older, kids get more expensive, lifestyle generally costs more, and monthly expenses are higher.  By the time you get to retirement age, your emergency cash needs are actually at their highest.  You will want a few years worth of cash available so that you can ride out any market fluctuations and not have to sell investments in a down market.  Your emergency fund based on your age should be 2 – 24 months of expenses, growing larger as you get older.

Lastly, think of other risks in your life that could lead you to need some quick cash – older cars, for instance, which could need expensive repairs.

Based on the potential need for emergency cash, or the severity of the need, decide how many months you could see yourself without a steady income.  Set this as the target for your emergency fund time frame.

Now, take the amount of money you are currently spending each month and multiply it by the number of months you feel is prudent for you specific circumstances.  This gives you the amount of cash you want in your emergency fund.

3.  Find a place to put the money.  Where should you store this cash?  First of all, let’s talk about where not to put it – don’t put it at risk, such as in the stock market or stock mutual funds where prices can fluctuate.  If you do, you could find your fund worth much less just when you need it.  Don’t store it in your checking account – it’s too easy to get to and you may find it being frittered away over time.

I like to keep money like this where it is liquid – I can get to it, but somewhat solid also – meaning I have to do some work to get to it.  If I have to ask someone’s permission, that is even better.  (You know, I saw a great deal on this really nice motorcycle, and I had this extra money in my checking account…don’t be that guy!).  Over the past few years, I have been storing my real emergency money inside the cash value of a life insurance policy.  This is working perfectly for me – it grows each month, it’s always available within 2-3 days, but I have to ask my agent (who is also a trusted friend) for access to the cash.  I have ordered him to hang up on me if I call with a stupid reason for needing the cash.  The think I did different with this policy was that we designed it to build cash value faster than normal.  The other thing this does for me is obvious – if my family needed it – there’s a lot more there than just my emergency funds.

Much easier to get set up and funded, however, is an online money market account, like ING or E*Trade offer.  They are shielded from your day to day checking account activities and still liquid enough to get to.  Interest rates on these accounts are all low right now, but the purpose of this account is liquid cash, not earnings.

Key Point:  Set an exact figure for your emergency fund.  You need to know how much money that is, how long it would last in an emergency, and if you have saved it or not.

Money Magazine’s cover story answers the question, “What to do with $1,000?”.   They give a list of 11 different things you could do with an extra $1,000. All the answers they gave have some merit, but I feel the bigger point was missed.  If you wait until you have an extra $1,000 to decide what to do with it, you will probably make the wrong choice.

I believe there are financial priorities that can apply to most everyone.  They are:

1. Emergency Cash
2. Eliminate short term, non tax deductible debt
3. Protect what you have and what you hope to someday have
4. Save for long term goals (education, retirement, etc)
5. Pay off your house.

By having a preplanned priority for your money, you will always be ready when money comes to do the most important thing with it.  As I studied finances, and thought about priorities for money, I decided that there are in fact, near-universal priorities.  For example, cash in the bank (#1) is more important than paying off your house (#5).  Paying off credit card debt is more important that saving for future college education expenses.

When creating a mortgage plan, or deciding what to do with an extra $1,000, having these priorities figured out ahead of time allow you to make better financial decisions.

If you make better financial decisions, you will have  a better chance at succeeding financially.  Decide ahead of time what the priorities are for your money to make better decisions.

Check out the presentation here to get more details on my financial priorities system.

The last 7 business days have been a roller coaster for mortgage rates – mostly the climb up to the top of the Coaster, unfortunately.  Mortgage rates are based on Mortgage Bonds’ prices.  When the Mortgage bond prices fall, rates go higher, and when the bond prices rise, rates are falling. The picture below show the last 30 days of bond prices – you can see on Oct 8^th, bond prices reached their highest point since late May and rates were at their lowest as a result.

From the high price on Oct 8th of 102.06 to the low on Oct 16^th of 100.375, mortgage bond prices fell by 168 basis points (100 basis points equals 1%).  This resulted in an increase in interest rates of about 0.5%.  Another way to see it: To keep the same rate you were offered on October 8^th you would have to pay 1.68% more in discount points.

The rate you are offered depends on three things:

1. You
2. The Mortgage Bond Market
3. The lender that will hold your mortgage (not your loan officer)

You:       The loan you apply for and are qualified for has the biggest impact on interest rates.  The loan program, credit score, downpayment or equity, repayment type, repayment terms all impact your rate.  These factors can change your rates by 0.125% to 3%. 

The Mortgage Bond Market:    As you can see above, the mortgage bond prices impact everyone’s rates every day. This explains why interest rate quotes can and do change from day to day, and why one lender may appear to have great rates one day and horrible rates the next day.  Think of the mortgage bond market as the ocean’s tide that raises and lowers everyone’s boats.

The Lender you work with:   A direct lender, such as a bank, has one set of rates – so when the tide rises, their rates rise just as fast.  A mortgage company that has the flexibility to work with a multitude of lenders can ‘jump ship’ when the tide rises.  When the tide rises, some boats don’t rise as fast as the others.  If you are working with  a direct lender, you can’t jump ship, unless you start all over, re-run your credit, and hope you jumped to the right ship.

  With an independent mortgage lender, they have the ability to work with many lenders, so when the tide rises, they can find the boat who is not floating as high as the rest.  Why does this happen?  Each day, lenders decide which loans they want to add to their portfolio.  If they want a particular loan, for example, 30 year fixed rate mortgages for $200,000 to $400,000 with credit scores above 750, they will attract those loans by offering lower rates – even if the bond market is higher.  If they don’t want a loan, for example, 5/1 ARMs with credit scores below 700, they will increase the rates on that program to discourage people from borrowing from them with that program.  This way, if the borrower insists on working with them, they will at least, earn a lot more profit, due to the higher rate they charged.

So how does all this work out?  On October 8^th, I talked with a home buyer who was able to get a 5.0% rate with no discount points.  By October 16^th, when he had contracted to buy a house, the mortgage bond market was 168 basis points (1.68%) worse.  This means to keep the 5.0% rate, he would have had to pay 1.68% in discount points, or 1.68% of the loan amount in added closing costs.

However, since we work with several lenders, we were able to find one lender that was only 25 basis points higher, rather than 168 points higher.  When we lock in the interest rate, we were able to preserve the 5.0% rate with just a slight increase in closing costs.

Lesson learned:

1.  Be the best you can be for a prospective lender – credit score, downpayment, loan program, and other things all impact the interest rate you will get.  Talk with a mortgage professional ahead of time to prepare yourself to get the best rates.
2. Mortgage Bond market – when you are buying a house, you can’t stop the tide from rising.  For refinancing, your mortgage professional should be able to monitor the market and be able to advise when the ‘tide’ is right for locking in the best rate.
3. Work with a lender that can ’jump ship’ when needed to find the lender that wants your business the most.  If you are working with a direct lender, such as your local bank, your loan officer can’t offer you this critical service.
4. The pundits will spend most of their time trying to analyze why the rates went higher or lower. For example,  “The market is concerned about inflation”, or “Oil prices are falling”.  Either way, it really doesn’t matter - the tide came in or out, so how does that affect your mortgage strategy for you?

A recent opinion piece in Investment News claimed that ‘For young couples, renting may be a better option”.  I hate headlines like that  – they are designed to get your attention, but most people don’t have the time to read the article.  They end up with this piece of random advice floating around their head that can cause them to doubt their decisions.

Here’s a good rule to follow – don’t take advice from newspapers and magazines!  Why?  First of all, you don’t know who wrote the article.  Was it written by a 23 year old journalism apprentice that has never owned a home?  If so, do you really want to take home buying advice from him?  Or, does the writer have a bias or an incentive to push a particular viewpoint?  For example, a proponent of reverse mortgages is also a paid spokesperson for a reverse mortgage lending company.  Do you think their advice is fair an balanced? 

So, should young couples rent or buy?  Right now, the $8,000 tax credit, the low interest rates and the home prices are all reasons to consider buying.

The Investment News article says the strongest reason to not buy right now is that prices could fall further.  This surprises me, as the industry that uniformly teaches ‘Buy and Hold’ rather than trying to time the market with stocks or mutual funds turns around and says, “Time the Market!”.  Waiting for prices to fall further is a sure setup for disappointment.  Think about it, even if prices fall further, will rates be higher when that happens?  Will the loan program that you can qualify for today still exist then?  What if prices fall, but rates are 1-2% higher than they are now? 

What if you did not buy a $250,000 house today because you ‘knew’ prices were going to drop by another 10% in the next 12 months?  Didn’t you make a good choice?  Well, if interest rates rose from 5% to 6.5% (from where they are today to where they were 1 year ago), your payment on the lower priced home next year would actually be $77 higher than if you bought right now.  Couple that with the money you threw away in 12 more months of rent (and for some, the loss of the $8,000 tax credit), and you are talking about a significant difference.

Why not buy now?  Don’t buy if you are going to move in less than three years.  Don’t buy if you haven’t been stable in your employment for the last few years.  Don’t buy if you don’t want to stay in the town in which you are looking to buy.

Fear or uncertainty of the future are never valid reasons for not taking action – there will always be economic uncertainty, change, and surprises.  If you aren’t going to buy because the ‘economy is bad’, then realize you are forcing yourself into a situation where,

1. You will never buy a home as the economy will always be bad, just starting to recover, or starting to get bad.
2. You’ll never buy because you don’t know what tomorrow will bring
3. You will buy, but only when the economy is strong, in which case you will be buying a house in a strong market, which means the prices and interest rates will be higher.

You can find a million reasons to buy a home or not buy a home right now.  Separate the facts from the headlines, consult with an independent professional and let them guide you through a sound decision making process.  Don’t take advice from a newspaper or magazine article as everyone’s circumstances are different.  Evaluate your choices in light of your unique circumstances. 

One other tool you can use is a Rent Vs. Buy calculator to help you see the differences between continuing to rent and buying a house.  The numbers don’t tell the whole story, but it is a good starting point to add some facts to a highly emotional decision.

 When someone is thinking up buying a house, they rarely, if ever, wake up one day with the dream of getting a mortgage.  The dream is to own a home. So people start looking for a home first, and that is where the problems usually begin

Here are the top 5 reasons to get your mortgage first: (plus a bonus reason)

1. You won’t spend too much. It’s easy to see that if you fall in love with a house first, then talk to a mortgage lender about the down payment and monthly payment, you could end up buying more house than you shouldafford.  By getting your mortgage first, you will know exactly what your closing costs, down payment and monthly payment will look like, so you won’t over extend yourself.  Too many people, after falling in love with a house, justify to themselves that they can afford the higher than expected costs. After a while, they regret the decision as they have trouble making ends meet.
2. You won’t spend too little!  This sounds crazy, when you just read reason #1, but think about it – if you spend too little and settle for a house that is too small, or in an inconvenient location(too far from work), or is missing a feature that you really need(2 car garage or bonus room), you will be looking to move and upgrade your house in just a few years.  So, if you buy a house that is too small, you will waste all that money on closing costs on the first house, and then spend even more money selling the house in just a few years and having to buy a new house with the right features. If you get the mortgage first, you will know what the right price range is and you can buy the right house for you the first time.
3. You won’t get surprised.   Many mortgage companies offer a full pre-approval.  Don’t confuse this with a fake pre-approval.  With a full pre-approval, your mortgage professional will collect pay stubs, bank statements, photo id, W2’s and possibly tax returns and have you sign all the application paperwork and disclosures.  If your ‘pre-approval’ consists of a phone call with a loan officer, it’s a ‘fake’ pre-approval and really just a pre-qualification.  A pre-qualification simply says, ‘Based on what you have verbally told me, we should be able to get your loan approved”.   A fake pre-approval or a pre-qualification gives you an indication of loan approval, but it’s not the same thing.  You still need to complete the paperwork and have an actual underwriter review your file.  Some mortgage companies won’t do this, but a good one should offer to get you you fully ‘credit approved’ prior to finding your house.  This leaves only the appraisal and sales contract to be reviewed by the underwriter, which leads to reason #4.
4. You can eliminate most of the stress of buying a house.  Most of the stress people experience when buying a house is totally preventable and mortgage related.  If you have your mortgage approved before you find the house, there isn’t really much left to do – pack a few boxes, clean up your old residence, and off you go.  Actually, there is a ton of stuff left to do.  Unfortunately, you can’t do any of it until you find the house and agree on the sales contract.  Except, of course, take care of the mortgage. So, rather than thinking about getting the mortgage approved, changing you address, packing, cleaning, registering kids in school, figuring out new routes to work, calming family members’ nerves about the move, changing your driver’s license and voter registration and 100 other things, you can focus on the 99 little things that still need to get done.  The mortgage application process is the only thing you can do prior to finding your new house, so don’t procrastinate and get one of the biggest items crossed off your to do list.
5. Your confidence will go sky high.  When your financing is taken care of, you will have a great deal of confidence that you are buying the right priced house and you will have no worries while waiting for the lender to call you back with news.  Eliminating uncertainty will increase your confidence about the whole process.
6. Bonus:  You will be able to negotiate a better deal.  If you are competing with another buyer, or if you are the only buyer, by being able to guarantee that you can buy the house, the seller will be much more comfortable accepting your offer, even if it’s not the highest one they receive, or not as high as they hoped for.  In today’s market, a fully approved buyer eliminates all the stress and surprise from the seller, too.  If you reduce their stress and uncertainty, you will be able to negotiate a better deal.

So, on that day when you wake up and decide it’s time to buy a house, stop, reconsider, and go buy your mortgage first – they really are two separate things.