A couple is planning to tour the United States in a travel trailer during their first few years of retirement. They are going to sell their current home now and purchase another home when they finish their travels. 
An interesting exercise is to determine the optimum time of selling the home: now or when they’re ready to buy their replacement home.
If they intend on traveling for more than three years, then, it may be a good decision to sell prior to the sojourn to avoid paying taxes on the gain in their home. IRS allows for a temporary rental of a principal residence while still keeping the $250,000/$500,000 capital gains exclusion intact. A homeowner must own and use a home for three out of the previous five years which means that it could be rented for up to three years, but it would need to be sold and closed before that three-year window expires.
If the travel will be less than three years, there is an option of selling now or later. Using the example below, the homeowner sold the home, paid their expenses and invested the proceeds in a three-year certificate of deposit until the replacement home was purchased.
As an alternative, if the homeowner rented the home, not only would they have income, the home would continue to appreciate and the unpaid balance would go down resulting in larger net proceeds. Based on a 5% appreciation and continued amortization of the mortgage, the net proceeds could easily be $40,000 more.
Obviously, there are a lot of considerations that affect the decision to sell now or later but in an appreciating real estate environment, being without a home for several years could affect the financial position of the owner in the replacement property. It is certainly reasonable to look at various alternatives before making a decision. Call me at (320) 762-7106 to help you look at the different possibilities and talk to your tax professional.
With the first quarter of 2018 in the books, the 30-year fixed rate mortgage is nearing what Freddie Mac predicted it would be in the second quarter. If this pace continues, rates will exceed the five percent mark expected by the end of the year. 
The Fed has had its first of an expected three raises for this year and two more are expected in 2019. While these rates are not directly related to mortgages, they certainly have an effect.
Delaying the decision to purchase or refinance could be an expensive missed opportunity. A $270,000 mortgage at 4.44% has a principal and interest payment of $1,358.44 per month. If the rate were to rise one-percent in the next twelve months, the payment would be $1,522.88.
The $164.44 increase would cost a homeowner an additional $13,812.97 in seven years and close to $60,000 over the full term of the loan.
The question facing people is “what would you spend $164.44 each month if you had acted sooner to get the lower rate?”
If you’re curious to know what your “missed opportunity” could be costing you, try this Cost of Waiting to Buy calculator . Use 0% increase on price change if you are refinancing a home you already own.
Read moreThe Federal Housing Authority, operating under HUD, offers affordable mortgages for tens of thousands of buyers who may not qualify for other types of programs. They are popular with both first-time and repeat buyers.
The 3.5% down payment is an attractive feature but there are other advantages: 
- More tolerant for credit challenges than conventional mortgages.
- Lower down payments than most conventional loans.
- Broader qualifying ratios – total house payment with MIP can be up to 31% of borrower’s monthly gross income and total house payment with all recurring debt can be up to 43%. There is a stretch provision taking it to 33/45 for qualifying energy efficient homes.
- Seller can contribute up to 6% of purchase price; this money must be specified in the contract and can be used to pay all or part of the buyer’s closing costs, pre-paid items and/or buy down of the interest rate.
- Self-employed may qualify with adequate documentation – two year’s tax returns and a current profit and loss statement would be required in addition to the normal qualifying and underwriting requirements.
- Liberal use of gift monies – borrowers can receive a gift from family members, buyer’s employer, close friend, labor union or charity. A gift letter will be required specifying that the gift does not have to be repaid.
- Special 203(k) program for buying a home that needs capital improvements – requires a firm contractor’s bid attached to the contract calling for the work to be done. The home is appraised subject to the work being done. If approved, the home can close, the money for the improvements escrowed and paid when completed.
- Loans are assumable at the existing interest rate with buyer qualification. Assumptions are easier than qualifying for a new mortgage and closing costs are lower.
- An assumable mortgage with a lower than current rates for new mortgages could add value to the property.
Finding the best mortgage for an individual is not always an easy process. Buyers need good information from trusted professionals. Call (320) 762-7106 for a recommendation of a trusted lender who can help you.
Read moreTaxpayers can decide each year whether to take the standard deduction or their itemized deductions when filing their personal income tax returns. Roughly, 75% of households with more than $75,000 income and most homeowners itemize their deductions.
Beginning in 2018, the standard deduction, available to all taxpayers, regardless of whether they own a home, is $24,000 for married filing jointly and $12,000 for single taxpayers.
Let’s look at an example of a couple purchasing a $300,000 home with 3.5% down at 5% interest. The first year’s interest would be $14,630 and property taxes are estimated at 1.5% of sales price would be $4,500.
The interest and property taxes would provide a combined total of $19,130 which is less than the $24,000 standard deduction. Unless this hypothetical couple has other itemized deductions like charitable contributions that would make the total exceed $24,000, they would benefit more from taking the standard deduction.
If the mortgage rate were at 8%, the combined total of taxes and interest would be almost $28,000 which would make itemizing the deductions more beneficial.
Tax professionals will compare available alternatives to find the one that will benefit the taxpayer most. For more information, see www.IRS.gov and consult a tax advisor.
Read moreIn any given market, inventories fluctuate based on supply and demand considering area and price range. The National Association of REALTORS considers a balanced market to be a six-month supply of homes. 
If it takes longer than six months to sell, it is thought to be a buyer’s market and less than six months, a seller’s market. Most buyers and sellers probably feel a balanced inventory is more like three months’ supply of homes.
The inventory of existing homes has been reduced to approximately 1.5 million houses which is 10.3% lower than a year ago. According to the Federal Reserve Bank of St. Louis there are 5.7 months’ supply of new homes currently on the market in the U.S.
Inventory has a direct impact on price. When demand is constant, but inventory is reduced, price tends to increase because the same number of people are trying to buy a smaller than normal number of homes.
As easy as it is to recognize the signs of spring, one should be able to spot the direction prices will be moving. When prices and mortgage rates are increasing, buyers are affected by not being able to afford the same price or size of homes.
Read moreOne of the silver linings to filing your income tax return is finding out that you are going to receive a refund. If you happen to be one of these fortunate taxpayers, your next decision is what to do with it. With the average tax refund around $3,000, it could be the difference that makes a home a reality sooner rather than later. 
Many would-be buyers think it takes 10% or more down payment to purchase a home, but actually, it can be much less. There are VA and USDA mortgages that have no down payment for qualified buyers. FHA has a 3.5% down payment program and FNMA has 3% down payment mortgages for qualified creditors.
Closing costs for originating new mortgages can easily range from two to three percent of the purchase price but most lenders will allow the seller to pay part or all of them based on the agreement in the sales contract.
While the average tax refund might not cover the down payment on the median price home, it certainly helps. Your refund could make it as simple as 1-2-3 to get into a home.
Get the hard, cold facts for the homes and mortgages in your area and price range.
Get pre-approved with a trusted mortgage professional.
Start looking at homes.
Call me at (320) 762-7106 or paulajackson@realtor.com to get started.
Read moreBuyers who have been concerned about what might happen to the tax laws affecting home ownership should feel more comfortable about moving forward with their decision to purchase. The 2017 Tax Cut and Jobs Act passed by Congress and signed by the President continues to treat real estate as a favored investment. 
Whether it is for a home to live in as your principal residence or to use as rental property, the tax laws are in place but other dynamics to be concerned with are not; mortgage rates are expected to rise as well as prices.
Reasons to buy now:
- The mortgage interest deduction is intact for most taxpayers.
- The capital gain exclusion for principal residences up to $500,000 remains in place.
- Taxpayers can elect annually to take newly increased standard deduction or itemize deductions whichever will benefit them the most.
- The house payment with taxes and insurance is most likely cheaper than the rent.
- Rents will continue to rise making the difference even greater in the future.
- Lock-in the principal & interest payment with a fixed-rate mortgage.
- 30-year mortgage terms are available to most borrowers.
- Prices will likely increase due to lower inventories and several years of low housing starts.
- Section 1031 exchanges, capital gains and depreciation remain the same for rental properties.
For a summary of specific real estate provisions in the 2017 Tax Cut and Jobs Act, click here.
Read moreIn 1968, mortgage rates were 8.5%. The next year, rates went down to 7%. Homeowners could buy a 15-20% larger home for the same payments if they could find someone to assume their mortgage. 
FHA and VA mortgages were very popular in certain price ranges and they allowed anyone to assume the mortgage regardless of the credit. If you could find a person to take over your note, you were free to qualify for another mortgage.
In October 1981, mortgage rates reached 18.63%. A $250,000 mortgage had a monthly principal and interest payment of $3,896.46. As astronomical as that rate sounds, people were still buying homes and were good investments.
Four years later, they were still over 12%. The monthly payment was $2,571.53. Believe it or not, people were excited to be paying only 2/3 what they had to pay a few years earlier.
Fast forward to late 1991 when the rates went below 9% and that same payment was to $2,015.16. At the turn of the 21st century, rates were 8.15% and that made the payment $1,860.62. Not much change in rates during that decade.
If we look around the housing bubble, late 2008, the rates were 6.04% and the payment was $1,505.31. By 2009, mortgage rates had fallen below 5%. The lowest mortgage rate was 3.31% on November 2012 with a payment of $1,096.27.
Rates fluctuated for the next few years until now, and most of the experts are expecting them to be above 5% by the end of 2018. Rates have increased each week for the last six weeks to 4.38% with payments of $1,240.12.
The average mortgage rate for the past 47 years is a little over 8%. The real estate and mortgage markets are cyclical. Rates have been historically low for a long period but will probably continue to rise. Most buyers don’t pay cash and mortgages enable them to purchase now. Based on history, even 8% would be an excellent rate. Until it reaches that point again, everything lower is a bargain.
Read moreSome buyers think that finding the right home is the critical part of the buying process and that is how they determine which agent to use. While it is important, there may be a broader skill set to consider when selecting your real estate professional. 
The most recent NAR Profile of Home Buyers and Sellers indicate that 52% of buyers do want help in finding the right home to purchase. There was a time when the public did not have access to all the homes on the market, but the Internet has changed that.
Helping to negotiate the price and terms of sale were identified by almost 25% of the buyers. No one wants to pay more than is necessary and the terms of the sale can be as important as the price.
The next largest area of assistance that buyers value has to do with financing and the paperwork. Even if a buyer has been through the process before, it very likely could have been several years and things have probably changed.
Since the cost of housing is dependent on the price paid for the home and the financing, a real estate professional skilled in these specialized areas can be very valuable in finding the “right” home. An agent’s experience and connections to allied professionals and service providers is equally important.
Ask the agent representing you to specifically list the tools and talent they have available to address these areas.
Read moreThe new tax law doubles the standard deduction and it is estimated that over 90% of taxpayers will elect to use it. However, even without considering tax benefits, home ownership has convincing advantages. 
Besides the personal and social reasons for owning a home, one of the most compelling is that it is cheaper. Principal reduction and appreciation are powerful dynamics that reduce the effective cost of housing.
Amortized loans apply a specific amount of each payment to the principal amount owed to retire the loan over the term. Some people consider it a forced savings account; when the payment is made, the unpaid balance is reduced.
The price of homes going up over time is appreciation. While there are lots of variables and it is not guaranteed, it is easy to research the history of an area and make predictions based on supply and demand.
Interest rates are still low and can be locked-in for 30 years. Without considering the tax benefits at all, the appreciation and the amortization dramatically affect the “real” cost of owning a home.
Consider a $250,000 that appreciates at 2% a year for the next seven years instead of paying $2,000 a month in rent. In the example, the payment is less than the rent being paid even including the property tax and insurance.
