An ominous plan is being proposed in Congress – to eliminate mortgage-interest tax deductions for all houses larger than 3,000 square feet. The proposal, part of a bill drafted by Rep. John Dingell, chairman of the House Energy and Commerce Committee, will introduce a “comprehensive climate change reform legislation,” it was announced. It includes this deduction-limiting provision.“Such a law is essential to reduce carbon emissions by 60 to 80 percent by the year 2050,” he said. “In order to address the issue of climate change, we must address the issue of consumption. We do that by making consumption more expensive.” He noted that houses have long been known to contribute to greenhouse gas emissions through heating, cooling, electrical usage and building materials. However, most home builders report they have followed “green” procedures in recent years. Houses constructed within the past few years are the tightest, energy-efficient in history.Lawrence Yun, senior economist for the National Association of Realtors, pointed out that terminating mortgage-interest tax deductions for all single-family homes larger than 3,000 square feet would result in a national median house price decline of about 4 percent on all homes, not just large houses. There are at least 10.4 million single-family homes that contain 3,000 square feet of living area or more. They make up about 15 percent of the nation’s owner-occupied housing stock. Read More »
What’s the most effective way to obtain the best possible home mortgage in today’s tight market? That’s the question asked by many home buyers, and owners wanting to refinance their existing mortgage.When Borrowers apply for an adjustable-rate mortgage today, lenders approve or reject them based on the fully indexed interest rate and higher monthly payment, not a short-term low rate and low initial monthly payment, it was noted in a special report carried in the September issue of Kiplinger’s Personal Finance magazine.Many first-time buyers look for 100 percent financing. That often involves expensive private mortgage insurance (PMI) or “piggyback” loans – two loans issued simultaneously. The cost of PMI largely depends on the borrower’s credit score. Many options disappear when scores are lower than 700, according to the report. With the score is 620 or lower, the buyer would probably not be able to obtain 100 percent financing.In most cases, it’s much better to make a down payment when purchasing a home – at least 5 percent down. Most lenders also want borrowers to have funds available for at least two months of principal, interest, taxes and insurance in reserve. Paying off as much debt as possible before applying for a mortgage is important, but a higher priority should be placed on improving your credit score. The two top considerations by lenders is the borrower’s credit score and down payment. However, overall debt is important. The standard debt-to-income ratio used by lenders is 28-36. Under that guideline, your monthly mortgage payment can’t exceed 28 percent of your monthly household income, and your total debt payments may not exceed 36 percent.The average rate on a 30-year fixed-rate mortgage is typically 1.5 percentage points lower for a borrower with a credit score of 760 to 850 than for someone with a score of 620 to 639, Kiplinger’s report pointed out. Before you apply for a mortgage, request your report, correct any errors, and take action such as paying down debt to improve your score. You’re entitled to one free credit report a year from each of the three major credit-reporting agencies. To obtain your free report, go to: www.annualcreditreport.com/. Read More »
Following close on the heels of the interest-only mortgage, the fifty-year adjustable rate mortgage (ARM) is the new kid in the in-crowd of specialized loans. Just as it sounds, this is a loan which has an end date fifty years from its inception, which, for most people, means a lifetime of loan payments. HSH Associates, Financial Publishers, refers to this type of loan as a “Hybrid ARM”, of which there are many varieties. Without getting into the finer points of interest adjustment ratios, the bottom line question is “What makes a fifty-year mortgage attractive to home buyers?” The simple answer to that is that the payments are lower. With the loan stretched out over fifty years, payments can be as little as half of those for a 30 year mortgage, and even lower comparative to a 15, 10, 5 or 1-year ARM. A home valued at $500,000, for instance, with a 5/1 adjustable rate mortgage of $400,000 at the current rate of 5% (many hybrid mortgages offer unusually low rates, and this is just one example—check with your lender for current rates in your area), your monthly payment would be $1816.56, of which $1666.67 will be interest at the beginning of the payment series. You would reach the half-way point (owing $200,000) after 453 payments (37 years and 9 months). By that time you would have paid a total of $822,901.63 of interest and principal. Again, note that you would be nearly 40 years into the mortgage and still owe $200,000 of principal! Now consider that a standard 30-year 1/5 ARM would cost far more initially--$2796.87 per month—but you would reach the halfway point in 265 payments (that’s a little over 22 years) and would have paid $617,642.11 by that time. That’s a saving of roughly $205,000. Run the numbers out to the end of the loan period and the difference grows dramatically. The purpose of a long-term loan is the reduction of the monthly payment so that more of your income can go to pay down other debt. The longer the term, the lower the payment. But the interest continues to accrue. The more quickly you pay down the loan, the less interest you pay in the long run. Pay slowly, and interest mounts quickly. In some cases of “payment-option” ARM’s, it is quite possible to enter the “negative amortization” zone. That is, you can make your monthly payment and owe more than you did before you sent the check. By now you are probably muttering about the fact that the numbers above are based on a house price that is above average for many places in the country and a mortgage interest rate to match. In fact, 1/5 ARMS are in the neighborhood of 6.35% and rising, and I chose a higher-than-average price because many home buyers still believe that it is fiscally sound policy to buy all the house they can afford . . . and then some. The hybrid (reverse, interest-only and 50-year payout) mortgages have made it possible for people to buy more house than they can rationally afford in the hope that housing prices will continue to boom and there will be significant equity into which they can tap down the line when they need cash. The average housing price has climbed in some areas into the area that used to be reserved for the elite, and the price is buying less and less house. Sadly, this “buy all you can buy” philosophy, which was prevalent in the mid-70’s, doesn’t hold water in an economy that is both inflationary and dangerously fragile. Corporate downsizing, out-sourcing, and the current trend towards smaller raises and give-backs in the form of benefits packages are taking the air out of the balloon. Though the housing bubble isn’t in danger of an immediate and drastic burst, it has almost stopped growing in some areas. According to sources in central New Jersey—always a high-priced market—houses are staying on the market longer and the bidding frenzy that drove them up has begun to slow. They are selling for the asking price instead of at a premium. New development houses are selling faster than existing homes, but the market has assumed a slow-and-steady pace that differs considerably from the rush of a year ago. Read More »
Some borrowers are now applying for exceptionally long-term mortgages to finance the purchase of a home or refinance an existing mortgage. The amortization periods can be extended to 40 or even 50 years. These loans were first introduced in the 1980s. The key reason for applying for such loans is to minimize the borrower's monthly payments. And it does just that, compared with a traditional 30-year mortgage. In many cases, selecting a long-term loan is the only way a marginal borrower can qualify for a needed mortgage. The lower monthly payment may make it possible to squeak by the qualification requirements. Some lenders are quite creative in structuring long-term mortgage offers. For example, they might offer a 40-year hybrid mortgage. This loan could be a 5/1 ARM, with five years of fixed-rate interest calculated from a 40-year amortization term, followed by 35 years with annual rate adjustments. A 50-year mortgage is rarely offered, but is still available from some lenders. It's considered something of a novelty by some experts, who occasionally compare it to the 99-year mortgage offered by a few lenders a couple of decades ago. Others consider these loans to be close to an interest-only mortgage. The downside to ultra-long-term mortgages is the huge additional interest that accumulates over the years. Also, these loans often require slightly higher interest rates and points. Some lenders require a larger down payment. In the long-term, it's a costly option, and it takes longer to build equity in the home. However, these mortgages can be very useful to home buyers who could not afford or qualify for a conventional 30-year mortgage. It could make the difference between being able to purchase a home or remaining as a renter. Jim Woodard writes a nationally syndicated column and freelance features on real estate and mortgage news and trends. Email: storyjim@aol.com Read More »
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