Why Do Some Home Owners Decide Not to Refinance Their Mortgages?

 

Refinancing into a lower rate is a great option for many home owners, but in today’s lending world of tighter guidelines, it may not always be possible. If the home owner doesn’t have enough equity in their home or has credit issues or recently experienced a hardship like the loss of a job, the lender may not refinance the current loan.

Another reason a homeowner may not refinance to a lower rate are due to the costs related to refinancing, which can range from 2-3% of your loan amount. You have to determine how long it will take you to recoup your money and if the new program aligns with your financial goals before you consider refinancing your current loan.

For example, if you currently have a 30 year fixed rate mortgage with a $700,000 loan amount and a 7% interest rate, you are paying $4,657 for principal and interest per month. If your current loan balance is $660,000 and you refinance at to 6.5% interest rate, you will be paying $4,171. This is a monthly savings of $486 per month. If the closing costs are 2% or $13,200, it will take you 27 months to recoup your money. For home owners planning on staying in their home for three or more years, it may make sense to refinance. It is also possible to include the closing costs in your new mortgage to alleviate the upfront costs, but again, you still have to determine the time to recoup this money and if the benefits are aligned with your overall financial plan.

I hope I was able to clear a few things up for Tyler and you as well. If you have additional questions about refinancing or wondering if it’s time for you to refinance, send me an email or take a look at The Mortgage Adoption Center. In the meantime, I have a great audio CD that I would love to share with you called Home Equity Myths with Douglas Andrew, the author of the popular book Missed Fortune: Dispel the Money Myth-Conceptions – Isn’t it Time You Became Wealthy? In this CD, Douglas dispels many common myths about managing your home’s equity. If you would like a copy, send me an email and I will get the CD out to you.

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Does Uncle Sam Pay My Mortgage Interest?

 

The other day I received a question from Tyler who was wondering why consumers are concerned about refinancing into lower interest rates when they don’t have to pay mortgage interest. Tyler explained that he thought all mortgage interest was tax deductible and reduced the amount of taxes you paid.

Unfortunately, the reality of tax deductions is they reduce your taxable income, or the amount of income subject to income taxes, not the amount of taxes you actually pay to Uncle Sam. Let’s say you make $100,000 annually and you paid $20,000 in mortgage interest. Because of the $20,000 you paid in mortgage interest, you can reduce your taxable income to $80,000. If you are in the 28% tax bracket, you will see approximately $5,600 in tax savings (28% of $20,000 = $5,600), not the entire $20,000.

Unfortunately, the reality of tax deductions is they reduce your taxable income, or the amount of income subject to income taxes, not the amount of taxes you actually pay to Uncle Sam. Let’s say you make $100,000 annually and you paid $20,000 in mortgage interest. Because of the $20,000 you paid in mortgage interest, you can reduce your taxable income to $80,000. If you are in the 28% tax bracket, you will see approximately $5,600 in tax savings (28% of $20,000 = $5,600), not the entire $20,000.

Thanks again Tyler for your question. As always, the forum is open to all questions and comments. Feel free to use me as a financial resource.

Thursday’s post will answer the refinance portion of Tyler’s question. We will discuss why a person may choose not to refinance and a few reasons people do not have the ability to refinance.

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Official Launch of the Mortage Adoption Center

 

I am pleased to officially announce the launch of the

As I explained in last week’s post, the Mortgage Adoption Center is a complimentary mortgage monitoring system that will check your mortgage information is against the latest rates. Whenever there is a refinancing option that can equate to real savings on your home mortgage loan, you are notified.

Are you a Realtor, CPA, Insurance Agent, or Financial Planner looking for a way to touch your database with something of value? Why not send an email blast with the Mortgage Adoption Center Yahoo News story? Yahoo provides a quick form where you can input your email addresses, include a personalized message, and there you go! If you prefer paper copies, send me an email and I will get some postcards out to you.

Out of the area? That’s ok too! I lend in California, Oregon, Washington, Nevada, Arizona and Hawaii.

Thanks to everyone who has already signed up. You will be hearing from me soon!

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Common Reverse Mortgage Myths

Lots of people have been asking me about, and looking for information on, reverse mortgages. I get a lot of questions about them so I thought that today I would counter a few misconceptions about them.

1. With a reverse mortgage, the lender will own my home.


This is absolutely false. You, the borrower, will retain title to your property. The reverse mortgage lender is simply extending a loan to the home owner.


Because you are still the home owner, it is still your responsibility to pay the property taxes, pay the hazard insurance, and maintain your home as you would if you had a first mortgage or home equity loan.

2. The reverse mortgage lender will take my home away if I outlive the loan.


This is also not true. Nor is the loan due at this time. As long as you remain living in the house as the primary resident and keep the taxes paid, you do not need to repay the loan at this time.

3. I still have a first or second mortgage on my property and therefore cannot obtain a reverse mortgage.


False. You may still be eligible for a reverse mortgage even if you still owe money on a first or second mortgage. The funds received would be used to payoff whatever existing mortgages are levied on the property.

4. If home prices drop, I will owe more than what the house is worth.


You will never owe more than the appraised value of your house when your house is sold. A reverse mortgage will not affect any of your other assets.

5. My heirs must sell my home in order to repay the reverse mortgage.


Again, false. The repayment of the loan can be satisfied by refinancing the home, or by using other assets.

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The Big MAC…and Just As Delicious!

 

The SanMateoMortgageBlog is proud to announce the launch of the Mortgage Adoption Center or the MAC for short. The Mortgage Adoption Center is for anybody that feels they have been abandoned by their lender, loan originator, Mortgage Broker or the endless amount of names that you may classify as simply, your loan person.

 

You would be considered abandoned if:

• You have not heard from your loan person since your closing
• You can’t even recall your loan person’s name (which is the reason you refer to them as your loan person)
• Your loan person does not call you every time there is an opportunity for you to save money on your mortgage
• Your loan person does not contact you every time there is a change in the market that may affect you as a homeowner

So is adoption in order?…Sign up at the Mortgage Adoption Center and start receiving the top notch attention that you deserve!

 

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The $250,000/$500,000 Capital Gains Exclusion, Excluded?

Monday I discussed some of the highlights of the Housing and Economic Recovery Act of 2008 (HR-3221). Hidden among the many pages of the bill, are some interesting changes to the Capital Gains Exclusion Rule.

Based on the new Capital Gains Exclusion Rule, the profits from the sale of your home (capital gains) may have to be shared with your favorite Uncle. Yes Uncle Sam has decided he wants his portion as well. Currently, homeowners enjoy tax free profits from the sale of their primary residence up to $250,000 (if filing single) or $500,000 (if filing jointly). As of January 1, 2009 this simple math will now will be replaced with the ratio mentioned in my last post:

What exactly does this mean to the San Mateo County homeowner? If you have owned your home for more than two years and have declared this home as your primary residence every year, you will still receive your full Capital Gains Exclusion ($250,000 if filing single, $500,000 if filing jointly) when you sell. But, if you are one of those savvy investor types that lived in a home two years for tax purposes and then converted it into a rental, you may have a problem.

Suppose you declared this property as your primary residence for two of the last five years. Under the current Capital Gains law, you would receive 100% of profits up to the exclusion tax free. Under the new law, you would only receive 40% of the exclusion tax free.

How will this affect the San Mateo County Housing Market and your home’s value? Will we see an increase in homes for sale as investors unload their inventory in the last half of this year? Will we be forced deeper into a buyer’s market? Only time will tell as we only have about four months to reap the benefits of the 2008 Exclusions.

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The New Housing Law: More Changes for San Mateo County Borrowers

Last Week President Bush signed the (HR-3221) Housing and Economic Recovery Act of 2008 into law. It will take me some time to dredge through the 694 pages, but in the meantime, here are some of the highlights and how it impacts San Mateo County borrowers and the soon-to-be borrowers.

• Conforming loan limits will now be permanent, but decreased from the current $729,750 down to $625,000.
• If you are a first time home buyer that purchased a home between April 9th 2008 and June 30th 2009, you can receive a tax credit up to $7,500.
• Earmarked funds for local governments to purchase and restore blighted homes and neighborhoods have not yet been designated.
• Adjustments to FHA
  • Expansion of the program to help delinquent homeowners
  • Termination of Down Payment Assistance Programs
  • Increased down payment from 3% to3.5%
  • Upfront Mortgage Insurance increase from 1.25% to 3%

• The Capital Gains Exclusion of $250,000 if you’re single and $500,000 if you are married will now be calculated as a ratio and not an all-or-nothing exclusion. The formula to calculate your Capital Gains Exclusion will be based on your home’s actual usage as a primary residence:

This is only a quick overview of this very important Housing Law. Watch for future posts that will address more of the issues that will impact you a homeowner or a soon to be homeowner in San Mateo County.

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Two New Tax Breaks for the Struggling Bay Area Homeowner

Adding to my last post, Mortgage Interest: A Friend to the Bay Area Home Owner, I came across two new tax breaks to help out homeowners in the Bay Area. First, Congress extended the mortgage insurance premium deduction for three more years. As you may know, mortgage insurance is sometimes required by the lender if the home owner makes a down payment of less than 20% of the appraised value of the house. Mortgage insurance protects the lender from a borrower who defaults on their loan and can be avoided by breaking up the loan into two separate mortgages. Using creative financing to eliminate mortgage insurance may not be best for your financial situation. Your Mortgage Consultant should be able to show which option works best for you. For those who do pay mortgage insurance, your costs could be 100% deductable. As with everything, there are some restrictions:

To deduct the mortgage insurance premiums paid in 2007, your loan had to be funded in 2007 and you must be within the income restrictions. If your adjusted gross income is $100,000 or less, you can deduct 100% of the mortgage insurance premiums paid in 2007. If you make between $100,000 and $109,000 your deduction will be a decreasing portion of the premium as your income increases. If you make $109,000 or more, the mortgage insurance premium deduction is completely eliminated.

The second tax break was passed at the end of 2007 and will help the homeowner facing foreclosure. Homeowners who were granted mortgage debt forgiveness on their primary residence do not have to pay taxes on their forgiveness up to $2 million. Under the previous law, if the value of your house declined, and your bank or lender forgave a portion of your mortgage, the tax code treated the amount as income that could be taxed. The new law will create a three year window for homeowners to refinance their mortgage and pay no taxes on the debt forgiveness that they receive.

If you need more information on these new laws or any tax related questions, consult your tax advisor. Or feel free to contact me and I will gladly point you in the right direction.

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