By: Tom Vanderwell
1. 6 months ago is ancient history. What your neighbor sold his house for 6 months ago doesn't matter. What the seller was asking for the house 6 months ago doesn't matter. What matters is what the market will support today.
2. Don't worry so much about what you paid for your house. Instead, look at the difference between what you can expect to sell your house for and what it's going to cost you to buy the new one that you want. I expect you'll find that those are much more important numbers (unless you end up without any equity, in which case you don't sell).
3. Now is not the time for do-it-yourselfers. When the inventory levels are, depending on property type and area, anywhere from twice as much as is healthy (single family homes near my hometown) to 750% as much inventory as there should be (condos in Florida, from what I've heard), you need to find a professional to help you navigate the markets and get your house noticed. I'm not, frankly, just talking about calling the Realtor who sold the house up the street. I'm talking about calling a high-caliber professional who knows what it takes and can really give your house the attention that it needs. . . .
4. Any interest rate that starts with a 6 is a good number. From 1971 to 1998, we did not see any mortgage rates that started with a 6. Frankly, we've gotten spoiled in an era of cheap credit and we need to keep things in perspective.
5. There is a Tangible Difference in working with a true mortgage professional. I'm not talking about the
difference between a mortgage broker...or a mortgage lender at a bank (like yours truly). I'm talking about the difference between someone who can help you navigate the changing environment that we're in.
6. Don't buy a house today if you aren't going to stay there at least 7 years. That's right, a mortgage lender is telling you that if you don't have at least a 7 year time frame in mind, you shouldn't buy a house right now. Why? It's all about the math. If the market drops another 5% over the next year and then stays the same for two years, it's going to take 7 years for you to recoup the 5% loss and then build up enough to pay the 6% Realtor's fees when you sell and make a little profit too. Long term, the value of real estate investments is very solid, but this market has spread things out a bit longer.
7. It really is a good time to buy a house. No, I'm not turning into a National Association of Realtors choir boy. If you go into the transaction with the right mindset (long-term investment), with a talented group of professionals (Realtor, lender, inspector and accountant) backing you up, and you remain analytical about the financials and keep the emotions from forcing decisions, I firmly believe that you'll find yourself very glad that you made the move you made. Is it the right time for everyone to buy and sell? Nope, but I have the feeling that there are a lot of people sitting on the sidelines because they are scared of what the mainstream media has done to the portrayal of the markets and are missing out on some great opportunities to move forward and upward.
Wednesday, September 3, 2008
Tuesday, July 8, 2008
1031 Exchanges and Why Some Investors are Choosing to Pay the Tax
Some real estate investors are opting to pay the capital gains tax on the sale of investment property now rather than defer the gains in a 1031 exchange amid concerns that a new presidential administration might raise the tax rate, according to the Wall Street Journal. A 1031 exchange, also called a like-kind exchange, lets a property owner roll over the capital gains from the sale of an old investment property to a new one, if certain conditions are met. Some investors believe that the current 15 percent capital gains tax rate could rise to 20 percent or 25 percent, so they are choosing to pay the taxes now, the Journal reports. Fri, Mar 14, 2008.
Comments:
I like the points Bob Sorey makes, but wanted to add a thought or two on 1031 TIC's. They are also great for successful investors who'd like to continue to reap the rewards of investment real estate but get out of property and tenant management. Since 2002 the 1031 TIC transactions have grown from a market of about $320 million to over $4 billion. For details, see an article I wrote with CRS Senior Instructor Doug Richards at http://mikemerin.com/articles.htm. Posted by Michael G. Merin - Wayne, PA on Sat, Mar 15, 2008 at 07:05:09
1031's are a good product regardless of the capital gains rate. One thing missing from the article just read is recapturing of depreciation or cost recovery...ie they are the same but different terms. This is 25% of what was depreciated while the property was owned. Everyone's situation is different. My older clients with plenty of money and a very low basis (purchase cost plus some additional things) are using the IRS code 1031 for estate planning so the basis is stepped up to current market value at their death and passed on to their heirs without having to pay taxes or cost recovery UNLESS their estate is over the estate tax threshold. With that in mind, please don't rule out using 1031's to defer the tax or have the tax eliminated as an estate planning tool. If they need cash, they borrow it because no tax is paid on borrowed money. Plus they can deduct the interest. My younger clients are cashing out and yes, they are cashing out and paying the 15% capital gains, 25% of what they depreciated and in Tennessee, there is not a state tax but other states have taxes that will also have to be paid. 1031's can be rolled into Wall Street investment grade commercial products called TIC's - Tenant In Common properties that pay monthly income. These products do qualify under the IRS code BUT the SEC - Security and Exchange Commission that regulates securities - stocks, bonds, mutual funds - requires a securities license to earn a commission. Min required license is a series 63 and 22. NAR has requested the SEC allow certain Realtors be exempt from the licensing. The SEC has not ruled on the request. The request is for specific NAR designations and persons who can show specific dollars and experience in commercial be exempt. Always consult a good tax account, CPA or attorney before suggesting or ruling out an exchange.
Bob Sorey, CCIM, ALC, CRSPosted by Bob Sorey - Mount Juliet, TN on Fri, Mar 14, 2008 at 23:36:35
Comments:
I like the points Bob Sorey makes, but wanted to add a thought or two on 1031 TIC's. They are also great for successful investors who'd like to continue to reap the rewards of investment real estate but get out of property and tenant management. Since 2002 the 1031 TIC transactions have grown from a market of about $320 million to over $4 billion. For details, see an article I wrote with CRS Senior Instructor Doug Richards at http://mikemerin.com/articles.htm. Posted by Michael G. Merin - Wayne, PA on Sat, Mar 15, 2008 at 07:05:09
1031's are a good product regardless of the capital gains rate. One thing missing from the article just read is recapturing of depreciation or cost recovery...ie they are the same but different terms. This is 25% of what was depreciated while the property was owned. Everyone's situation is different. My older clients with plenty of money and a very low basis (purchase cost plus some additional things) are using the IRS code 1031 for estate planning so the basis is stepped up to current market value at their death and passed on to their heirs without having to pay taxes or cost recovery UNLESS their estate is over the estate tax threshold. With that in mind, please don't rule out using 1031's to defer the tax or have the tax eliminated as an estate planning tool. If they need cash, they borrow it because no tax is paid on borrowed money. Plus they can deduct the interest. My younger clients are cashing out and yes, they are cashing out and paying the 15% capital gains, 25% of what they depreciated and in Tennessee, there is not a state tax but other states have taxes that will also have to be paid. 1031's can be rolled into Wall Street investment grade commercial products called TIC's - Tenant In Common properties that pay monthly income. These products do qualify under the IRS code BUT the SEC - Security and Exchange Commission that regulates securities - stocks, bonds, mutual funds - requires a securities license to earn a commission. Min required license is a series 63 and 22. NAR has requested the SEC allow certain Realtors be exempt from the licensing. The SEC has not ruled on the request. The request is for specific NAR designations and persons who can show specific dollars and experience in commercial be exempt. Always consult a good tax account, CPA or attorney before suggesting or ruling out an exchange.
Bob Sorey, CCIM, ALC, CRSPosted by Bob Sorey - Mount Juliet, TN on Fri, Mar 14, 2008 at 23:36:35
Monday, June 2, 2008
Sellers, Time to Rethink Lowball Offers
In a buyer’s market like we are currently in, many potential buyers have turned to two words that most sellers despise, “lowball offer”! Buyers invariably feel as if their home is worth every penny it is listed for, because for them it is just not a monetary investment but also includes the time and memories that they have invested. So when a lowball offer arrives, they quickly become on the defensive as most feel as they are getting taken advantage of.
This is not the right reaction to have for a couple of reasons. One reason is that a dialogue has been started, and that it might result in the sale of the home. Secondly, but equally importantly, detachment and objectivity is needed when selling a home- especially in today’s market.
If a seller wants to avoid the situation of dealing with a lowball offer, it is important that they price the property competitively at the start. Some owners will overprice the property in order to be able to negotiate and still get the price they were originally wanting, but this is not a good strategy. It is better to price the property in comparison to recent sales and homes in the neighborhood in order to avoid lowball offers.
For buyers it is important when financing is an issue, to be preapproved before submitting an offer. It is even a better negotiating tool if the offer is not contingent on the sale of a home.
While the market is slow, competitively priced properties continue to sell. Do not let your property languish on the market, price it right and even consider negotiating on lowball offers!
This is not the right reaction to have for a couple of reasons. One reason is that a dialogue has been started, and that it might result in the sale of the home. Secondly, but equally importantly, detachment and objectivity is needed when selling a home- especially in today’s market.
If a seller wants to avoid the situation of dealing with a lowball offer, it is important that they price the property competitively at the start. Some owners will overprice the property in order to be able to negotiate and still get the price they were originally wanting, but this is not a good strategy. It is better to price the property in comparison to recent sales and homes in the neighborhood in order to avoid lowball offers.
For buyers it is important when financing is an issue, to be preapproved before submitting an offer. It is even a better negotiating tool if the offer is not contingent on the sale of a home.
While the market is slow, competitively priced properties continue to sell. Do not let your property languish on the market, price it right and even consider negotiating on lowball offers!
Monday, May 12, 2008
Expect a Summer Rise in Home Sales
A flat pattern in home sales activity should continue for the next couple of months before improving over the summer, according to the latest forecast by the NATIONAL ASSOCIATION OF REALTORS®.Lawrence Yun, NAR chief economist, said the extent of an expected recovery hinges on better access to affordable loans. “Things are beginning to improve, but the availability of affordable mortgages is uneven around the country and sometimes within metropolitan areas,” he says. “As anticipated, we continue to look for a soft first half of the year, for both housing and the economy, before notable improvements in the second half. Some time is needed for FHA and new conforming jumbo loans to become widely available.”
The Pending Home Sales Index, a forward-looking indicator based on contracts signed in March, edged down 1.0 percent to 83.0 from a downwardly revised level of 83.8 in February, and was 20.1 percent lower than the March 2007 index of 103.9. NAR President Richard F. Gaylord says additional costs in many markets are hindering a recovery. “Our members are telling us that more buyers are looking at homes but are slow in signing contracts, and that’s contributing to the weakness in pending home sales,” he says. “In many cases buyers are waiting for greater access to affordable credit, especially in higher cost areas, but some are disappointed with what appears to be unnecessarily restrictive lending requirements. The good news this week is there is some discussion toward relaxing some of the burdensome lending practices.”The PHSI in the Northeast jumped 12.5 percent in March to 80.8 but remains 15.4 percent below a year ago. In the South, the index slipped 0.1 percent to 84.9 and is 26.7 percent lower than March 2007. The index in the West declined 1.4 percent in March to 91.2 and is 9.5 percent below a year ago. In the Midwest, the index fell 10.4 percent in March to 74.1 and is 22.3 percent below March 2007.Existing-home sales are projected to rise from an annual pace of 4.95 million in the first quarter to 5.82 million in the fourth quarter. For all of 2008, existing-home sales are likely to total 5.39 million, and then rise 6.1 percent to 5.72 million next year. “Although more than half of local markets are expected to see price growth this year, the aggregate existing-home price will decline 2.4 percent in 2008, driven by a relatively few markets that are very oversupplied,” Yun says. The median price is forecast at $213,700 this year before rising 4.1 percent to $222,600 in 2009. Some areas already are seeing sales increases, underscoring that all real estate is local. In March, unpublished snapshot data shows sales in Bakersfield, Calif., and Jackson, Miss., were higher than a year ago. At the same time, price gains were noted in markets such as Buffalo-Niagara Falls, and Cedar Rapids, Iowa. On May 13, NAR will report first-quarter data on metropolitan area home prices, covering about 150 metro areas, and state home sales. “Although some market adjustments are necessary, a downward overshooting of the housing market would cause unnecessary loss in economic output, income, and jobs,” Yun says. “It is critical to stimulate housing demand by inducing fence sitters back into the market. A home buyer tax credit on any home purchase would accomplish that.”Here are some highlights from NAR's report:
New-homes. Sales of new homes are expected to fall 30.9 percent to 536,000 this year before rising 10.1 percent to 590,000 in 2009. Housing starts, including multifamily units, will probably drop 29.5 percent to 955,000 in 2008, and then rise 1.3 percent to 967,000 next year. The median new-home price is estimated to fall 3.7 percent to $238,000 this year, and then rise 5.4 percent in 2009 to $250,900.
Rates. The 30-year fixed-rate mortgage is likely to rise gradually to 6.2 percent by the end of the year, and then average 6.3 percent in 2009.
Affordability. NAR’s housing affordability index is expected to rise 10 percentage points to 127.0 for all of 2008.
GDP. Growth in the U.S. gross domestic product (GDP) should be 1.5 percent this year and 2.3 percent in 2009. The unemployment rate is projected to average 5.3 percent in 2008 and 5.5 percent next year.
Inflation. Inflation, as measured by the Consumer Price Index, is seen at 3.4 percent this year and 2.2 percent in 2009. Inflation-adjusted disposable personal income is forecast to grow 1.2 percent in 2008 and 3.0 percent next year.
The Pending Home Sales Index, a forward-looking indicator based on contracts signed in March, edged down 1.0 percent to 83.0 from a downwardly revised level of 83.8 in February, and was 20.1 percent lower than the March 2007 index of 103.9. NAR President Richard F. Gaylord says additional costs in many markets are hindering a recovery. “Our members are telling us that more buyers are looking at homes but are slow in signing contracts, and that’s contributing to the weakness in pending home sales,” he says. “In many cases buyers are waiting for greater access to affordable credit, especially in higher cost areas, but some are disappointed with what appears to be unnecessarily restrictive lending requirements. The good news this week is there is some discussion toward relaxing some of the burdensome lending practices.”The PHSI in the Northeast jumped 12.5 percent in March to 80.8 but remains 15.4 percent below a year ago. In the South, the index slipped 0.1 percent to 84.9 and is 26.7 percent lower than March 2007. The index in the West declined 1.4 percent in March to 91.2 and is 9.5 percent below a year ago. In the Midwest, the index fell 10.4 percent in March to 74.1 and is 22.3 percent below March 2007.Existing-home sales are projected to rise from an annual pace of 4.95 million in the first quarter to 5.82 million in the fourth quarter. For all of 2008, existing-home sales are likely to total 5.39 million, and then rise 6.1 percent to 5.72 million next year. “Although more than half of local markets are expected to see price growth this year, the aggregate existing-home price will decline 2.4 percent in 2008, driven by a relatively few markets that are very oversupplied,” Yun says. The median price is forecast at $213,700 this year before rising 4.1 percent to $222,600 in 2009. Some areas already are seeing sales increases, underscoring that all real estate is local. In March, unpublished snapshot data shows sales in Bakersfield, Calif., and Jackson, Miss., were higher than a year ago. At the same time, price gains were noted in markets such as Buffalo-Niagara Falls, and Cedar Rapids, Iowa. On May 13, NAR will report first-quarter data on metropolitan area home prices, covering about 150 metro areas, and state home sales. “Although some market adjustments are necessary, a downward overshooting of the housing market would cause unnecessary loss in economic output, income, and jobs,” Yun says. “It is critical to stimulate housing demand by inducing fence sitters back into the market. A home buyer tax credit on any home purchase would accomplish that.”Here are some highlights from NAR's report:
New-homes. Sales of new homes are expected to fall 30.9 percent to 536,000 this year before rising 10.1 percent to 590,000 in 2009. Housing starts, including multifamily units, will probably drop 29.5 percent to 955,000 in 2008, and then rise 1.3 percent to 967,000 next year. The median new-home price is estimated to fall 3.7 percent to $238,000 this year, and then rise 5.4 percent in 2009 to $250,900.
Rates. The 30-year fixed-rate mortgage is likely to rise gradually to 6.2 percent by the end of the year, and then average 6.3 percent in 2009.
Affordability. NAR’s housing affordability index is expected to rise 10 percentage points to 127.0 for all of 2008.
GDP. Growth in the U.S. gross domestic product (GDP) should be 1.5 percent this year and 2.3 percent in 2009. The unemployment rate is projected to average 5.3 percent in 2008 and 5.5 percent next year.
Inflation. Inflation, as measured by the Consumer Price Index, is seen at 3.4 percent this year and 2.2 percent in 2009. Inflation-adjusted disposable personal income is forecast to grow 1.2 percent in 2008 and 3.0 percent next year.
Tuesday, May 6, 2008
House Hunting Center
By Dian Hymer
Distributed by Inman News
One of the first things you should do if you're thinking about selling is to walk through your home and examine it with a critical eye. Imagine yourself as a buyer and force yourself to make mental note of all the imperfections you've ignored for years.
Don't be surprised if you're overwhelmed by what you see. The drapes may be faded and frayed from years of sun exposure. If you have children or pets, the interior doors and baseboards may be nicked and need paint. Your furniture might be outdated and the floors might look worn. It may strike you that the place needs so much work that you ought to just move out, slap on a fresh coat of paint, redo the floors and sell the house vacant.
Painting and floor refurbishing are good ideas. Renewing the interior surfaces of your home when you sell is one of the most cost-effective improvements you can make to increase your net proceeds. Buyers usually pay more for homes that are in move-in condition.
However, selling a vacant home could result in a lower net return. The main reason for this is that first impressions play a big part in selling homes. When buyers walk into a home that looks bright, inviting and comfortable, they feel good. When most buyers walk into a vacant home, they feel that something is missing.
HOME SELLER TIP: Many people have a hard time imagining what a vacant home will look like when it's furnished. For these buyers, a vacant house poses a problem. They walk into an empty living room and start worrying about how they'd furnish it. It can be a threatening experience.
Home buying is stressful enough without having to worry about how the floor plan works and which room is used for what. A strategically furnished house creates a more pleasurable viewing experience and reduces the stress of buying.
Granted some buyers, such as architects and designers, have the ability to conceptualize in three-dimension. Some experienced buyers have moved so many times that they've developed the knack of visualizing their furniture in an empty space. But, you are likely to sell your home for more money if you can appeal to the entire pool of prospective buyers, not just those who have a particular expertise.
You can certainly sell your home vacant. Virtually everything sells at a price. The question is how much more could you sell your home for if it was attractively furnished?
A listing in the Oakland Hills (Calif.) was put on the market last fall. It had a great view, but was vacant. It did not sell after three months on the market during a time when all well-priced listings in the area were selling. The listing was temporarily withdrawn from the market and staged with rental furniture and accessories. It was put back on the market at the same price and sold right away.
The cost of staging your home for sale may seem prohibitive, but it needn't be. Many sellers who stage their homes for sale use their own furniture after removing outdated pieces and rearranging the rest.
Tattered draperies can be removed and often don't need to be replaced, unless they cover an unsightly or distracting outlook. For selling purposes, it's important to let in as much light as possible.
It's a good idea to consult with a decorator who specializes in staging homes for sale. A stager can arrange to bring in furniture if you decide that's what you need. To keep costs down, you may be able to create an inviting ambiance without furnishing your entire house or condo.
THE CLOSING: The living and dining room, kitchen, family room and master bedroom are the most important places to concentrate your staging efforts.
Distributed by Inman News
One of the first things you should do if you're thinking about selling is to walk through your home and examine it with a critical eye. Imagine yourself as a buyer and force yourself to make mental note of all the imperfections you've ignored for years.
Don't be surprised if you're overwhelmed by what you see. The drapes may be faded and frayed from years of sun exposure. If you have children or pets, the interior doors and baseboards may be nicked and need paint. Your furniture might be outdated and the floors might look worn. It may strike you that the place needs so much work that you ought to just move out, slap on a fresh coat of paint, redo the floors and sell the house vacant.
Painting and floor refurbishing are good ideas. Renewing the interior surfaces of your home when you sell is one of the most cost-effective improvements you can make to increase your net proceeds. Buyers usually pay more for homes that are in move-in condition.
However, selling a vacant home could result in a lower net return. The main reason for this is that first impressions play a big part in selling homes. When buyers walk into a home that looks bright, inviting and comfortable, they feel good. When most buyers walk into a vacant home, they feel that something is missing.
HOME SELLER TIP: Many people have a hard time imagining what a vacant home will look like when it's furnished. For these buyers, a vacant house poses a problem. They walk into an empty living room and start worrying about how they'd furnish it. It can be a threatening experience.
Home buying is stressful enough without having to worry about how the floor plan works and which room is used for what. A strategically furnished house creates a more pleasurable viewing experience and reduces the stress of buying.
Granted some buyers, such as architects and designers, have the ability to conceptualize in three-dimension. Some experienced buyers have moved so many times that they've developed the knack of visualizing their furniture in an empty space. But, you are likely to sell your home for more money if you can appeal to the entire pool of prospective buyers, not just those who have a particular expertise.
You can certainly sell your home vacant. Virtually everything sells at a price. The question is how much more could you sell your home for if it was attractively furnished?
A listing in the Oakland Hills (Calif.) was put on the market last fall. It had a great view, but was vacant. It did not sell after three months on the market during a time when all well-priced listings in the area were selling. The listing was temporarily withdrawn from the market and staged with rental furniture and accessories. It was put back on the market at the same price and sold right away.
The cost of staging your home for sale may seem prohibitive, but it needn't be. Many sellers who stage their homes for sale use their own furniture after removing outdated pieces and rearranging the rest.
Tattered draperies can be removed and often don't need to be replaced, unless they cover an unsightly or distracting outlook. For selling purposes, it's important to let in as much light as possible.
It's a good idea to consult with a decorator who specializes in staging homes for sale. A stager can arrange to bring in furniture if you decide that's what you need. To keep costs down, you may be able to create an inviting ambiance without furnishing your entire house or condo.
THE CLOSING: The living and dining room, kitchen, family room and master bedroom are the most important places to concentrate your staging efforts.
Wednesday, April 30, 2008
No Real Benefit to Paying Off Mortgage
But if you insist on being 'free and clear,' here's how to do it
Q: Our condominium unit is now worth approximately $350,000, and we owe only $25,000 on our mortgage. We are from the old school, and want to own this property free and clear. We have the money, and are considering paying off the loan. Is this a good idea, and if so, how do we go about making sure that it is done correctly?
A: The old school is a reference to our parents (or grandparents) who lived through the recession in the 1930s. Because the stock market crashed, and lots of people were unemployed, those who owned their home free and clear of any debt at least had a roof over their head and did not have to sleep in the streets or under the bridges.
There are many people today with this same mindset, and while I personally disagree with this concept, I certainly respect and understand their views.
Let me play devil's advocate. You have $325,000 in dead equity -- this is the difference between what your property is worth and what you currently owe. Three or four years ago, your condominium unit probably increased in value between 10 and 20 percent, if not more. In today's market, the value of your home has probably decreased slightly, although some recent statistics regarding Washington, D.C., indicate that while sales have slumped, property values last year nevertheless increased by about 10-12 percent.
Appreciation is not dependent on whether you have a mortgage or on how much you owe on your home. The house will increase (or decrease) in value regardless of whether you have a mortgage. Thus, in my opinion, the money you have in your property -- which we call "equity" -- is just sitting there; it is "dead equity."
You now want to take $25,000 out of your savings and pay off the loan. Why? You are getting some small tax benefit from the interest deductions and presumably you are getting a decent rate of return on your investments. Other than the satisfaction of owning your house free and clear, I do not see any benefits by paying off that mortgage.
In fact, I would recommend that you consider refinancing. Interest rates today are comfortably low, with the national average for a fixed 30-year loan hovering around 5.5 percent. You could, for example, borrow $100,000, pay off your outstanding debt, and after paying closing and settlement costs walk away tax-free with approximately $73,000. The monthly mortgage payment on this loan (at 5 5/8 percent) would be $575.66 -- which is probably close to what you are currently paying. And because this is a new mortgage, your interest deductions would be larger.
For example, if you are in the 28 percent tax bracket (i.e. married, filing a joint tax return and earning less than $200,300 per year), this would provide you with a monthly deduction of $161.18 (or $1,934 yearly), and your real monthly payment would be only $414.47. (Note: Unless the money you borrow is used to improve your property, under current tax law you are only able to deduct interest in the first $100,000 when you refinance your current mortgage).
Many readers will challenge me. They will point out that it makes no sense to pay 5 5/8 percent on a mortgage and only be able to get 4 or 5 percent interest by putting the refinanced money in a savings account.
I do not disagree with this. But over the years, I have had too many clients from the old school who are "house rich and cash poor." They own their house free and clear but do not have sufficient money to pay the increasing real estate taxes or the insurance premiums. I firmly believe that everyone should have money in the bank -- even if it does not pay a lot of interest -- for that rainy day.
If you still want to pay off your mortgage, here's what you should do.
First, make absolutely sure that there is no prepayment penalty attached to your loan. Because your loan is so low -- and you have had the mortgage for a number of years -- I doubt that there is such a penalty, but you have to confirm this. When you first obtained that loan, you signed two important documents: a promissory note and the deed of trust (also known as a mortgage). The terms and conditions of your loan -- including any prepayment penalty -- will be spelled out in those documents. Read them carefully. If you have trouble understanding the legal language, discuss the situation with your lender or your lawyer.
You should send a formal written request to your lender asking for a payoff statement, and advise the lender of the exact date that you expect to send in your payment. The lender will advise you of the outstanding balance, and will also provide you with the "per diem" interest.
Mortgage interest is calculated in arrears. So when you make your February payment, for example, that will pay the principal and interest that accrued during the month of January. For most loans -- other than those insured by the Veteran's Administration (VA) -- you can pay off your loan at any time. Example: Assuming you made the February payment, the payoff statement will indicate the principal balance as of Jan. 31, and it will also tell you what the daily interest will be. Since you plan to pay it off on February 23, multiply the per diem interest by 23, and add this amount to the outstanding balance.
Keep in mind, however, that interest will continue to accrue to the time the lender actually receives your check. So I would add 10 additional days of interest, just to be on the safe side. All legitimate mortgage lenders will refund any excess payments to you.
If you have a mortgage insured by the U.S. Department of Veterans Affairs, to my knowledge that is the only loan that requires you to pay a full month of interest. In that case, try to coordinate your payment so that it reaches the lender by the end of the month.
What about any escrows that your lender is holding to pay real estate taxes and insurance? The payoff statement should advise you of the amount being held in escrow. Some lenders will deduct this amount from the outstanding balance; most lenders, however, will send you a separate check for this amount after you make your final payment.
And don't forget to advise both your real estate tax office and your insurance company that you will now be responsible for these payments. I recently represented a lawyer who paid off his loan, but forgot to advise the taxing authority. It was only when he learned that his house was about to go to tax sale that he was able to resolve the situation.
When you first got your loan, the deed of trust was recorded among the land records in the jurisdiction where your property is located. Now that you have paid off the loan, you want to make sure that it will be released from land records. Some jurisdictions require that a Certificate of Satisfaction be recorded, while others use a Deed of Trust Release.
Your lender will either arrange to record the release or will send it to you for recording. Either way, you want absolute confirmation that the release has been accomplished. This means that you want proof of recording, which you can get from your local recorder of deeds.
Finally, your lender should return the original promissory note, marked "paid and cancelled." The note is known in law as a "bearer instrument." This means that anyone who has that document could claim that you still owe the money. While this is not a major problem, since you will have proof that you paid off the note, why ask for trouble? Make sure that the lender returns the note to you.
Q: Our condominium unit is now worth approximately $350,000, and we owe only $25,000 on our mortgage. We are from the old school, and want to own this property free and clear. We have the money, and are considering paying off the loan. Is this a good idea, and if so, how do we go about making sure that it is done correctly?
A: The old school is a reference to our parents (or grandparents) who lived through the recession in the 1930s. Because the stock market crashed, and lots of people were unemployed, those who owned their home free and clear of any debt at least had a roof over their head and did not have to sleep in the streets or under the bridges.
There are many people today with this same mindset, and while I personally disagree with this concept, I certainly respect and understand their views.
Let me play devil's advocate. You have $325,000 in dead equity -- this is the difference between what your property is worth and what you currently owe. Three or four years ago, your condominium unit probably increased in value between 10 and 20 percent, if not more. In today's market, the value of your home has probably decreased slightly, although some recent statistics regarding Washington, D.C., indicate that while sales have slumped, property values last year nevertheless increased by about 10-12 percent.
Appreciation is not dependent on whether you have a mortgage or on how much you owe on your home. The house will increase (or decrease) in value regardless of whether you have a mortgage. Thus, in my opinion, the money you have in your property -- which we call "equity" -- is just sitting there; it is "dead equity."
You now want to take $25,000 out of your savings and pay off the loan. Why? You are getting some small tax benefit from the interest deductions and presumably you are getting a decent rate of return on your investments. Other than the satisfaction of owning your house free and clear, I do not see any benefits by paying off that mortgage.
In fact, I would recommend that you consider refinancing. Interest rates today are comfortably low, with the national average for a fixed 30-year loan hovering around 5.5 percent. You could, for example, borrow $100,000, pay off your outstanding debt, and after paying closing and settlement costs walk away tax-free with approximately $73,000. The monthly mortgage payment on this loan (at 5 5/8 percent) would be $575.66 -- which is probably close to what you are currently paying. And because this is a new mortgage, your interest deductions would be larger.
For example, if you are in the 28 percent tax bracket (i.e. married, filing a joint tax return and earning less than $200,300 per year), this would provide you with a monthly deduction of $161.18 (or $1,934 yearly), and your real monthly payment would be only $414.47. (Note: Unless the money you borrow is used to improve your property, under current tax law you are only able to deduct interest in the first $100,000 when you refinance your current mortgage).
Many readers will challenge me. They will point out that it makes no sense to pay 5 5/8 percent on a mortgage and only be able to get 4 or 5 percent interest by putting the refinanced money in a savings account.
I do not disagree with this. But over the years, I have had too many clients from the old school who are "house rich and cash poor." They own their house free and clear but do not have sufficient money to pay the increasing real estate taxes or the insurance premiums. I firmly believe that everyone should have money in the bank -- even if it does not pay a lot of interest -- for that rainy day.
If you still want to pay off your mortgage, here's what you should do.
First, make absolutely sure that there is no prepayment penalty attached to your loan. Because your loan is so low -- and you have had the mortgage for a number of years -- I doubt that there is such a penalty, but you have to confirm this. When you first obtained that loan, you signed two important documents: a promissory note and the deed of trust (also known as a mortgage). The terms and conditions of your loan -- including any prepayment penalty -- will be spelled out in those documents. Read them carefully. If you have trouble understanding the legal language, discuss the situation with your lender or your lawyer.
You should send a formal written request to your lender asking for a payoff statement, and advise the lender of the exact date that you expect to send in your payment. The lender will advise you of the outstanding balance, and will also provide you with the "per diem" interest.
Mortgage interest is calculated in arrears. So when you make your February payment, for example, that will pay the principal and interest that accrued during the month of January. For most loans -- other than those insured by the Veteran's Administration (VA) -- you can pay off your loan at any time. Example: Assuming you made the February payment, the payoff statement will indicate the principal balance as of Jan. 31, and it will also tell you what the daily interest will be. Since you plan to pay it off on February 23, multiply the per diem interest by 23, and add this amount to the outstanding balance.
Keep in mind, however, that interest will continue to accrue to the time the lender actually receives your check. So I would add 10 additional days of interest, just to be on the safe side. All legitimate mortgage lenders will refund any excess payments to you.
If you have a mortgage insured by the U.S. Department of Veterans Affairs, to my knowledge that is the only loan that requires you to pay a full month of interest. In that case, try to coordinate your payment so that it reaches the lender by the end of the month.
What about any escrows that your lender is holding to pay real estate taxes and insurance? The payoff statement should advise you of the amount being held in escrow. Some lenders will deduct this amount from the outstanding balance; most lenders, however, will send you a separate check for this amount after you make your final payment.
And don't forget to advise both your real estate tax office and your insurance company that you will now be responsible for these payments. I recently represented a lawyer who paid off his loan, but forgot to advise the taxing authority. It was only when he learned that his house was about to go to tax sale that he was able to resolve the situation.
When you first got your loan, the deed of trust was recorded among the land records in the jurisdiction where your property is located. Now that you have paid off the loan, you want to make sure that it will be released from land records. Some jurisdictions require that a Certificate of Satisfaction be recorded, while others use a Deed of Trust Release.
Your lender will either arrange to record the release or will send it to you for recording. Either way, you want absolute confirmation that the release has been accomplished. This means that you want proof of recording, which you can get from your local recorder of deeds.
Finally, your lender should return the original promissory note, marked "paid and cancelled." The note is known in law as a "bearer instrument." This means that anyone who has that document could claim that you still owe the money. While this is not a major problem, since you will have proof that you paid off the note, why ask for trouble? Make sure that the lender returns the note to you.
Monday, April 14, 2008
Don’t be Fooled: Fence Sitters are Not Buyers
Dear friend/person who read something I was quoted as saying in the media/random blogger:
Thank you so much for your thoughts on the state of the housing market. I was most impressed with your emphatic declaration that real estate is currently overpriced and that the nearly 70 percent of Americans who own their own homes are "just a bunch of ninnies."
It is not always easy to be smarter than two-thirds of the country, but you, with your smug declaration that you would "continue renting till prices fall 50%" are clearly some kind of exceptionally far-sighted genius. The fact that you may have previously come to me as a potential client, only to be told that your target housing would cost five times your annual income, does not weigh in on this debate.
No, you may not have had the wisdom to pull your salary up or your desires down to get your income in line with a starter home; how could you have, when you were using that gigantic brainpower of yours to declare that home prices would keep falling till 2010? When I first got out of college I went to work on Wall Street. I missed the crash of '87 but was in the office for the mini-crash of '88, where grown men (and they were mostly men) who had been in the business for 20 years stopped what they were doing to gather around a computer screen. That was a bad market day, the kind we used to say would drive investors "out on the ledges." Well, clearly housing has cycles just as stocks. The fact that America's real estate is in a slide is best illuminated by the stat that last year home prices went down, the first decrease since the 30's. But it really doesn't mean that all market activity has ceased. Existing homes may be selling at a pace of only 5 million a year, but honestly, that's enough business for me that you can stop cracking jokes about m What's more, not all of those home sales are the painful struggles that you imagine them to be. I know I'm in the Northeast, which has been spared some of the pain, but things up here that are listed at decent prices still go pretty quickly. I listed my suburban house at 3 percent less than my Realtor advised — yup, I wouldn't sell outside of my own real estate territory, just like a doctor wouldn't cut out his own appendix — and I got an offer the week after I listed. But these are joys that you too can experience, the gut-wrenching thrill of watching neighborhood prices pop up and slide down, when you become a homeowner. Until then, don't act supercilious and tell me, "oh, everything's overpriced, I'm not a buyer." True, some listings are overpriced, but the ones that aren't are attracting people who have kids and need more space, or people who have to move for their jobs. I'm a homeowner because paying a mortgage is my way of hiding money from myself, and the monthly loan. Even as the market cycles up and down, I'm building equity, and in 30 years I expect to be richer than I am now. Even as the real estate market is getting stomped on, nearly 5 million people like me are around. You tell me at these prices you're not a buyer? Honey, you never were.
Alison Rogers is a licensed salesperson and author of "Diary of a Real Estate Rookie."
Thank you so much for your thoughts on the state of the housing market. I was most impressed with your emphatic declaration that real estate is currently overpriced and that the nearly 70 percent of Americans who own their own homes are "just a bunch of ninnies."
It is not always easy to be smarter than two-thirds of the country, but you, with your smug declaration that you would "continue renting till prices fall 50%" are clearly some kind of exceptionally far-sighted genius. The fact that you may have previously come to me as a potential client, only to be told that your target housing would cost five times your annual income, does not weigh in on this debate.
No, you may not have had the wisdom to pull your salary up or your desires down to get your income in line with a starter home; how could you have, when you were using that gigantic brainpower of yours to declare that home prices would keep falling till 2010? When I first got out of college I went to work on Wall Street. I missed the crash of '87 but was in the office for the mini-crash of '88, where grown men (and they were mostly men) who had been in the business for 20 years stopped what they were doing to gather around a computer screen. That was a bad market day, the kind we used to say would drive investors "out on the ledges." Well, clearly housing has cycles just as stocks. The fact that America's real estate is in a slide is best illuminated by the stat that last year home prices went down, the first decrease since the 30's. But it really doesn't mean that all market activity has ceased. Existing homes may be selling at a pace of only 5 million a year, but honestly, that's enough business for me that you can stop cracking jokes about m What's more, not all of those home sales are the painful struggles that you imagine them to be. I know I'm in the Northeast, which has been spared some of the pain, but things up here that are listed at decent prices still go pretty quickly. I listed my suburban house at 3 percent less than my Realtor advised — yup, I wouldn't sell outside of my own real estate territory, just like a doctor wouldn't cut out his own appendix — and I got an offer the week after I listed. But these are joys that you too can experience, the gut-wrenching thrill of watching neighborhood prices pop up and slide down, when you become a homeowner. Until then, don't act supercilious and tell me, "oh, everything's overpriced, I'm not a buyer." True, some listings are overpriced, but the ones that aren't are attracting people who have kids and need more space, or people who have to move for their jobs. I'm a homeowner because paying a mortgage is my way of hiding money from myself, and the monthly loan. Even as the market cycles up and down, I'm building equity, and in 30 years I expect to be richer than I am now. Even as the real estate market is getting stomped on, nearly 5 million people like me are around. You tell me at these prices you're not a buyer? Honey, you never were.
Alison Rogers is a licensed salesperson and author of "Diary of a Real Estate Rookie."
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