The really bad money decision millennial homeowners are making

Millennials are often described as prioritizing leisure and entertainment, but many are going into debt to fund them.

Most financial planners caution homeowners against using home-equity loans to fund short-term expenses, including vacations. Yet that is the most popular use of the money for the more than half of U.S. homeowners between the ages of 30 and 34 who have owned a home for three years or more and have taken out a home-equity loan, according to results of a recent Discover Home Equity Loans survey.

“It mystifies me that they’re taking out additional debt,” said Jackson Mueller, deputy director of the FinTech Program for the Center for Financial Markets at the Milken Institute, a nonpartisan think tank that aims to increase global prosperity. “But it doesn’t really surprise me that they’re using alternative financing to fund certain things.”

Many millennials are shunning credit cards, looking for less expensive ways to borrow, he said.

Borrowing against a home can be a less expensive way to attain funds than credit cards. The average interest rate on a home-equity loan was 4.88% for the week ending Aug. 17, according to Bankrate.com; the average rate on a home-equity line of credit was 4.75%. The average credit-card rate was 16.1%. Interest on home-equity loans also may be tax deductible, said TJ Freeborn, spokeswoman for Discover Home Equity Loans.

The survey findings show that for many borrowers, “the home not only is the place they live and create memories, but also a financial asset,” Freeborn said. The results of the survey showed that 30 to 34 year-olds were also more likely than other age groups to view their home as an investment property.

But borrowing against your home comes with risks. “It’s because people took money out of their homes that they went underwater,” said Deidre Campbell, global chair of the financial services sector for Edelman, a communications marketing firm that has done research on millennials and money. When housing prices fell during the last housing crash, some who took money out of their homes ended up owing more than the homes were worth — leading to a rise in foreclosures and short sales.

Edelman research paints millennials as a group that is very traditional, and one that worries about money, which Campbell said may run counter to the Discover findings. This is a generation that is concerned about its financial stability, and having equity build up in a house creates more stability, she said.

The Discover report found that 51.3% of those homeowners between 30 and 34 (who have owned for three years of more) have taken a home-equity loan out against their home. Only 29.4% of those between 35 and 44, 19.9% of those between 45 and 54, 25.7% of those between 55 and 64, and 22.3% of those 65 and older also said they took out a home-equity loan against their home. The results come from a survey of 1,428 consumers, conducted earlier this year. The survey didn’t cover the dollar amount of the loans.

The most popular reasons the youngest group took the loans were vacations (43.3%) and emergency cash (41.8%), followed by home remodels (41.1%), medical expenses (36.2%) and weddings (31.2%). For the other age groups, debt consolidation and home remodels were the top responses.

“Home-equity loans should never be used for something like a vacation or other short-term wants,” wrote Ryan Fuchs, a financial planner with Ifrah Financial Services in Little Rock, Ark., in an email interview. Using a home-equity loan for emergency cash can be wise in some cases, he added. “For example, if your home or car is damaged in a storm, and you need to get something fixed before the insurance check will be received, then that can make sense.” Once the insurance money is in hand, that loan can be paid off.

Home remodels that add value to the property, such as redoing a kitchen or a master bath, can be a good use of home equity, Fuchs said. He also prefers home-equity lines of credit over closed-end home-equity loans. A HELOC only accrues interest if and when you draw money from the line; when you take out a chunk of money via a home equity loan, “it starts accruing interest immediately no matter when you actually spend the money from the loan.”

Source: Market Watch, Amy Hoak
http://www.marketwatch.com/story/millennials-are-tapping-home-equity-for-vacations-and-emergency-cash-2016-08-24?dist=realestate

What Is Interest? The Fee That Can Tack Thousands Onto Your Mortgage

You’ve probably overheard homeowners boast that they nabbed a “great interest rate” on their mortgage. But what is interest, exactly?

Essentially, interest is an extra fee you pay your lender for loaning you the money you need to buy a home. Lenders, after all, don’t just fork over their money out of the goodness of their hearts.

“They want to be compensated for putting money in your pocket,” says Jack Guttentag, author of “The Mortgage Encyclopedia.” Since mortgage lenders are providing cash upfront to make homeownership possible, they require you to repay the debt plus interest.

Now, if you’ve got a lot of dough lying around and want to pay for the whole house upfront with an all-cash offer, you can avoid paying interest. But let’s face it, most of us aren’t living in this dreamy scenario, which makes home loans and interest par for the course—so it pays, literally, to know how it all works.

How interest rates on home loans work

When you get a mortgage, your interest payment is calculated as a percentage of the total loan amount. For example, say you get a 30-year $200,000 loan with a 4% interest rate. Over 30 years, you would end up paying back not only that $200,000, but an extra $143,739 in interest.

Month to month in the above scenario, your mortgage payments would amount to about $955 per month. Part of that monthly payment would go toward paying back what you borrowed (an amount known as your principal), and the rest goes toward interest.

The exact proportion varies month to month—early on, homeowners typically pay more interest and less principal—but that composition changes as the loan matures. For instance, in your very first month for the above scenario, you’d pay $288 to your principal and $666 to interest. By your last check to your lender 30 years later, you’d pay $951 toward principal and $3 toward interest (check out realtor.com®‘s mortgage calculator to punch in your own numbers).

So what does this payment schedule mean for homeowners? It means it will take time for you to build equity in your home, since you’re largely paying interest during the early years. Yet there’s an upside to this reality: Interest on a home loan is deductible on your taxes, so early on you will get a big tax break that dwindles as your equity rises.

Why interest rates fluctuate

Fluctuations are based on several factors.

“During a period of slack economic activity, [the Federal Reserve] will provide more funding and interest rates will go down,” says Guttentag. Conversely, “when the economy heats up and there’s a fear of inflation, [the Fed] will restrict funding and interest rates will go up.”

These financial shifts could be stressful if they affected your monthly mortgage payments, but luckily when you get a home loan, there’s a way to shield yourself from this roller coaster by getting a fixed-rate mortgage, which locks in your rate at whatever level it is at the time you apply. It remains the same over the life of your loan (typically 30 years). Or else, if you don’t mind the market’s ups and downs, you can opt for an adjustable-rate mortgage.

How to get a low-interest loan

Not everyone who applies for a home loan gets the same interest rate. It varies widely depending on a variety of factors.

Probably the biggest variable is you: Interest rates for home loans vary depending on the borrower’s credit score. Good credit leads to lower interest rates, which is why it’s important to know your credit score and keep it stellar.

Your interest rate can also vary based the type of loan you get: 15-year loans, for example, typically offer lower interest rates than 30-year loans. ARMs have lower interest rates than fixed-rate mortgages (at least at first).

The bottom line: Paying interest may be a reality to homeownership, but how much interest you pay runs a wide gamut, so make sure you grasp the basics before you apply.

Source: Realtor.com, Daniel Bortz
http://www.realtor.com/advice/finance/what-is-interest-home-loan-mortgage/?is_wp_site=1

Survey: Save for 3 Years for a Down Payment

Home owners who had to save up to buy a home spent an average of three years shoring up their finances before they had enough for a down payment, according to a new survey of more than 2,000 Americans commissioned by NerdWallet and conducted by Harris Poll. 

One in four home owners overall say they saved money individually on a monthly basis to afford their down payment, which includes 42 percent of millennial home owners, ages 18 to 34, and 29 percent of Gen X home owners, ages 35 to 54, according to the survey.

"Home buyers should work closely with their real estate agent to find properties that aren't at the top of their budget to keep affordability in check," says Chris Ling, head of home buying and mortgages for NerdWallet. "Also, working on a consistent savings plan for a down payment and closing costs, as well as addressing any outstanding credit issues, will increase homebuyers' chances of qualifying for better mortgage rates."

The survey also found that about seven in 10 Americans — or 71 percent — have fears about buying a home. The top fears cited are home repairs (36%), the financial commitment of home ownership (35%), not having enough money for other expenses (35%), and the long-term commitment it means to their partner (9%).

Source: NAR via NerdWallet
https://www.nerdwallet.com/blog/mortgages/nearly-half-couples-split-home-down-payment-survey/

Mortgage Math Made Simple

What’s more terrifying than global warming, national economic collapse, or a zombie apocalypse?  For many of us, it’s math—especially the type involved in securing a mortgage to buy a home.

But mortgage math doesn’t have to be intimidating. Though a home loan does indeed involve a few equations, it’s fairly easy to break it all down into the kind of simple arithmetic every home buyer can understand and, more important, needs to know.

Take note: The latest figures available show the median home costs about $220,000, so we’ll use that figure as a base for our calculations. Other figures we’ll use: an average family’s annual salary is about $54,000 and it carries $7,630 in debt.

How much do you need for a down payment?

Though you can contribute as little as 3.5% of a home’s value for a down payment, lenders consider an ideal down payment to be 20% of a home’s total price. So here’s the math on that for the average-priced home:

20% of $220,000 = $44,000 down payment

This would leave $176,000—the amount a home buyer will need for the mortgage.

Another reason to aim for 20% down: You’ll avoid paying private mortgage insurance, which is typically required under that threshold. And that will cost you about $1,000 per year, says David Bakke of Money Crashers.

(Still, if that hefty 20% is an unattainable goal, at least try to put down 10% for a significantly better interest rate than you’d get with 3.5%.)

How much will a mortgage cost per month?

A mortgage can be paid off in numerous ways, but one of the most typical is to stretch those payments out over 30 years—that way, you break it down into bite-size pieces. Building off the numbers above, here’s how much your average mortgage would cost per month:

$176,000 at 4% interest rate = $840.25 monthly payment

Keep in mind, this monthly bill does not include property taxes, home insurance, HOA dues, or other home-related maintenance fees, which vary by area but are in the ballpark of a few hundred per year for a home at this price.

Also note that the longer you stretch out your mortgage payments, the more you’ll end up paying in interest. Over 30 years, the total you’ll fork over in interest amounts to $302,490.33!

But there are ways to lower the amount you pay in interest—like paying off your loan faster. Finish in 15 years, and you’ll end up paying only $234,333.13 in interest. Granted, for a 15-year loan you’ll have to cough up more per month—$1,301.85 instead of $840.25. But the upside is you’ll save a sizable chunk in interest over the life of your loan, and be mortgage-free in half the time. So if you can afford it, it’s an option worth considering.

How much mortgage can I afford?

Of course, you’ll want to buy a home that you can comfortably pay for. So, how do you know how much is too much, too little, or just right? The way they do this is by determining your debt-to-income ratio.

For most conventional loans, experts say you’ll want your DTI ratio lower than 36%. That means your debts don’t exceed more than about one-third of your income. But how does a mortgage fit into that?

To figure that out, start with your gross income (what you take home before taxes). Let’s say your family pulls in the U.S. average, which is $54,000 per year. Divide that over 12 months to get your monthly income.

$54,000 / 12 months = $4,500 income per month

Then total up your debts—including what you owe on credit cards, auto insurance, and college loans. Remember, debt includes only items that appear on a credit report, not recurring expenses like groceries or phone bills. Since the average American carries an average debt of $7,630 per year, we’ll use that number. Divide that by 12 to get your monthly debt:

$7,630 (average debt) / 12 months = $636 debt per month

Now, add that monthly debt to your average monthly mortgage payment of $840.25 to get your total debt owed per month:

$636 debt + $840.25 mortgage = $1,476.25 debt per month

Next, divide your monthly debts by your monthly income

$1,476.25 monthly debt / $4,500 monthly income = 33% DTI

In this scenario, the debt-to-income ratio is 33%—just below the 36% cutoff. Which means this mortgage would most likely pass the bank’s muster with flying colors! Calculate your own DTI here.

See? Not so hard. Granted, this is a simplified version of mortgage math; your own results will depend on your income, debts, and other circumstances. But if there’s one thing we hope you take away from this, it’s that mortgages are nothing to fear—a little knowledge goes a long way. And if you get stuck, there’s no need to copy from your neighbor’s paper, since we have this handy mortgage calculator to help you whiz through these permutations with ease.


Source: Realtor.com, Margaret Heidenry
http://www.realtor.com/advice/finance/mortgage-math-made-simple/?iid=rdc_news_hp_carousel_theLatest

Crowdfunded Real Estate: Should You Jump on the Bandwagon?

Just about everyone these days is looking to make a few extra bucks. But with the recent stock market turmoil (thanks loads, Brexit!) and paltry interest rates making savings accounts seem only slightly better than just stuffing cash underneath your Casper mattress for (lumpy) safekeeping, investors are on the prowl for the next lucrative investment.

Enter crowdfunding. It’s a concept that has been defined over the past decade mainly by money-raising schemes for offbeat, feel-good, or flat-out-weird ventures: documentary films, donations for disaster relief, headphones for cats, you name it. So what’s the allure for real estate, a booming business that generally doesn’t seem to need the help of contributions from mass groups? Simply put: It allows average folks to live the speculator’s dream—to  pool together their money to invest in apartment complexes, office spaces, even commercial shopping centers.

Give the credit to a change in federal laws that kicked into effect in May. It opened up the concept of getting money back on crowdfunded investments—as opposed to, say, just a free T-shirt via Kickstarter—to the masses, rather than just the wealthy.

As a result, crowdfunding real estate companies have been popping up at a breakneck pace, allowing ordinary men and women to dream of becoming a real estate mogul. (Because real estate moguls are all the rage these days, in case you haven’t noticed.)

But are these types of projects a safe investment for those who don’t have billions (or maybe millions) in the bank like Donald Trump? The experts say: Probably not. After all, you’d be gambling on projects that may never get constructed or rake in profits.

“Crowdfunding can be insanely risky,” warns Sherwood Neiss, principal of Crowdfund Capital Advisors, a venture capital firm that invests in financial technology companies. “Your chances of losing your investment is greater in crowdfunding than [in many] other forms of investing.”

How does crowdfunded real estate work?

Here’s the idea: Instead of getting a token gift for your cash contribution, like you would on Kickstarter or Indiegogo, fledgling venture capitalists will get an agreed-upon amount of money back from their investments—or a percentage of the profits if the projects are successful. Note that little word: if. If they don’t actually get built or turn a profit, investors could say bye-bye to a chunk of cash.

Amateur financiers can now go to websites like Fundrise, iFunding, or CrowdStreet and plunk their money down on various real estate projects ranging from new hotels to shopping complexes. Different companies and endeavors require different minimum investments, charge a variety of fees, and deliver disparate returns.

Fundrise, for example, boasts 12% to 14% average returns on investments as small as $1,000 on its website. Neiss, the venture capitalist, says that if the projects are successful, investors can pocket returns ranging from 8% to 12% annually, or even higher over a span of severals. And CrowdStreet, which set up shop in 2013, delivered an average 14.6% return on investment in 2015, says co-founder Darren Powderly.

“We’ve been buying stocks online for 20 years,” Powderly says. “So why not be able to purchase private investment real estate online as well?”

There are now about 150 crowdfunded real estate platforms in the U.S. “It is exploding,” says Ian Ippolito, a retired entrepreneur and investor who edits The Real Estate Crowdfunding Review, a website with tools and advice for would-be crowdfunders.

Before the change in May, only accredited investors were allowed to put money into crowdfunded projects where money was expected to be returned.  Accredited investors are folks who earn at least $200,000 a year ($300,000 if they’re married) or have a net worth of at least $1 million (not including their main home).

But the most recent part of the Jumpstart Our Business Startups Act, or JOBS Act, a four-part law that was originally passed in 2012, opened the doors of crowdfunding to the other 99%. The investments are regulated by the U.S. Securities and Exchange Commission.

Now, those bringing home less than $100,000 a year can invest up to $2,000 annually. Or they can put down up to 5% of either their income or their net worth (whichever is less), according to the SEC. Those making more than $100,000 a year can plunk down up to 10% of their annual earnings or net worth, with a $100,000 cap on investments.

Invest with care

But would-be investors shouldn’t let the SEC’s oversight of the investments lull them into a false sense of security.

“The SEC is not vetting how good the [investment or] sponsor is,” says Paul Habibi, a real estate and finance professor at the University of California, Los Angeles. “The SEC is vetting for crooks.”

More cautious investors, financial experts suggest, should consider parking their money in debt instead of equity.

In plain English, debt typically refers to shorter-term loans, around three to five years or less, that developers use to fund the projects and are sometimes backed by the property itself, says Seth Oranburg, a law professor at Duquesne University in Pittsburgh. Therefore, it’s generally a safer bet.

Equity is more like stock in the project and is therefore more risky if the development never gets off the ground or doesn’t turn a profit. The money can be tied up indefinitely and, in some cases, never returned.

But whether it’s debt or equity, crowdfunded real estate is “a new and risky area that people should only enter if they’re willing and able to risk losing their investment,” Oranburg says. Got that?

A safer alternative

Wannabe real estate magnates who don’t have the stomach to risk their piggy banks may want to consider real estate investment trusts instead, says Matthew Fronczke, a research director at kasina, an industry financial services advisory firm.

REITs are typically corporations that invest in real estate and mortgages, and public REITs are traded on the big financial exchanges like a stock. Typically, investors can sell their stock at any time instead of tying it up for years through crowdfunding.

Another REIT advantage: Much like mutual funds, they typically have skilled investment teams managing the money, vetting potential developers, and putting the deals together. Sure, crowdfunding platforms will often scrutinize the investments they offer. But it’s not always to the same degree.

And everyday folks, no matter how many books they read and online seminars they take, can’t be expected to analyze every project, every construction site, every location, and the demographics and economies of those areas.

They should, however, do their homework and look for local projects they can see go up with their own eyes.

“Be very wary of developers that have no track record, no history, haven’t raised any money, and have no experience of success,” Neiss says. “Look for the smaller investments that you know the community could actually use.”

Advantages of crowdfunded real estate

Despite the risk, there are some advantages to putting your money into these newfangled real estate investments.

Crowdfunding allows amateur financiers to pour their cash into a variety of projects located all over the map—including within their own communities. They’re also in the driver’s seat, choosing where their money goes instead of leaving it up to, say, the REIT.

Bottom line: Aspiring real estate magnates eager to take their chances shouldn’t put more than 10% or 15% of their investment portfolios into crowdfunding, says the Real Estate Crowdfunding Review’s Ippolito. Diversify, diversify, diversify!

“That way when the stock market is doing bad, real estate will probably be doing good and hopefully offsets it,” he says.


Source: Realtor.com, Clare Trapasso
http://www.realtor.com/news/trends/crowdfunded-real-estate/?iid=rdc_news_hp_carousel_theLatest

How to Begin Investing in Real Estate

The housing market is well on the mend, with prices steadily rising in much of the country. It may be a good time, then, to think about adding real estate to an investing portfolio.

True believers say there's nothing like owning a second, third or fourth property. Of course, true believers tend to be those who survived catastrophes like the housing meltdown about a decade ago. Ask those who were hammered and you get another view.

One thing is clear: for a beginner, real estate is a different game. The lessons you learned with stocks, bonds and mutual funds aren't much of a guide.

"The biggest thing someone should understand is that a real estate investment is more than an investment when compared to stocks and bonds. It should be viewed as a business," says Donovan Ryckis, financial advisor at J Donovan Financial in Florida. "It will require time, management and due diligence above and beyond most investments."

While that can be daunting, it has its upside, says Eric Workman, senior vice president of marketing at Chicago-based Renovo Financial, a lender to real estate investors. Unlike with stocks, you're not casting your lot with executives you've never met.

"As an investor, you have complete control over all of the decisions related to the property – level of finish, items replaced and or repaired, standards of tenant quality, rentals rates, etc.," Workman says.

Over the past year, single-family home prices have grown by 5.3 percent, while the stock market has been nearly flat, according to the Case-Shiller index of home prices. Studies have shown that, nationwide, homes appreciate at just over the inflation rate for the long term, and that stocks do better. But nationwide averages don't mean much to the investor looking for a property in one local market.

Also, most real estate investors hope to earn income from rents as well as profit from appreciation.

"Prices have risen for the past seven-plus years, and part of what has driven that growth is the (low) cost and availability of debt and equity," says David Becker, managing director of the equity division at Time Equities, a New York City-based real estate firm. "Interest rates remain at all-time lows, which is fueling certain asset classes like multi-family (buildings)."

Among real estate's appeals: it often marches to a different drummer. If your stocks are down, perhaps your real estate will be up. That's not always true, as homes and stocks plunged in tandem in the financial crisis, but it's true often enough for many advocates.

Real estate prices tend to be less volatile than stock prices, because homes, stores and offices cannot be bought and sold with the click of a mouse.

Because real estate can be used as collateral, it's cheaper to borrow to pay for real estate than for many other investments. And if you borrow, say, 80 percent of the purchase price, selling for 10 percent more than your purchase price means a 50 percent gain.

Buying a vacation property has an added bonus: using it yourself.

Still, there are drawbacks. That same leverage that turned a 20 percent down payment into a 50 percent gain can quickly turn into a loss if the market sours. The stability that looks so appealing when you buy can turn into a nightmare if you cannot quickly attract a buyer when you want to sell.

And the benefit of a small down payment may be offset by mortgage interest payments, taxes, and insurance and upkeep costs, while carrying costs are little or nothing for stocks, bonds and funds. The vacation "benefit" can get stale if you feel it's a waste of money to go somewhere else. On top of all that are the headaches of dealing with renters.

"Unforeseen events are always a risk when it comes to real estate investing," Becker says.

If interest rates rise, for example, prospective buyers won't have as much to spend, undercutting property values. "I do not see interest rates rising overnight, but a market can quickly be turned sideways by a major negative event," Becker says.

With those warnings in hand, here are a few options for a real estate investment.

Buy a vacation home. You get to use it yourself while hoping to make some money. Though rental income may not cover all your costs, especially at the beginning, you may profit from appreciation over the years.

"I would advise to start with vacation property rather than a fixer-upper," says Peter Anadranistakis, president of Caliber, The Wealth Development Company, in Scottsdale, Arizona. "Get a property in a dense neighborhood, close to cafes, museums, restaurants, attractions and public transportation."

[See: 8 Stocks to Buy For a Starter Portfolio.]

In addition to the costs mentioned above, you may have to pay a rental manager. In some markets, commissions gobble 25 percent of the rent. If the property is not near your main home, you'll probably have to pay a professional to deal with maintenance and repairs, even little things you would do yourself at home, such as squeaky hinges and blown light bulbs.

Vacation home markets can be especially volatile, with prices and rental income plunging in a weak economy when people shun luxuries.

Buy a full-time rental. Buying a home or condo for full-time renters means you are not limited to a vacation area like the beach, lake or mountains. You can get a property near where you live, cutting some of the maintenance costs. And you won't have to find a new renter every week or two, though you could lose plenty of sleep with a bad renter who's not going anywhere.

Flipping. Buying a home, fixing it up and quickly selling is reality-show staple, but most experts warn this is a risky way to get started in real estate. It takes a lot of knowledge, time and tolerance for setbacks, and it's very hard to make money without contributing sweat equity. If you're not handy and don't enjoy construction work, stay away.

"It is becoming harder to find deals to flip, as spreads (between purchase and sales prices) are becoming smaller with appreciation," says Than Merrill, CEO of FortuneBuilders, a San Diego-based training firm for real estate investors.

Invest in your own home. Remodeling, renovating and expanding can add value to the home you live in, and have an immediate payoff in enjoyment. If your home has serious need for improvement and is in a healthy market, this is probably the smartest real estate investment for a beginner nervous about being a landlord.

Be careful though, because most improvements do not add as much value as they cost, according to the annual surveys by Remodeler magazine. To make improvements pay financially, you need to choose carefully, not get carried away with personal preferences, and probably do a lot of the work yourself.

Buy real estate investment trusts. REITs are like mutual funds that own real estate instead of stocks or bonds, and they can be bought and sold in an instant. Though each REIT specializes in a certain type of property – strip malls, apartment buildings, office complexes and so on – REITs spread the risk among a number of properties and use professional management, says Wilson Magee, director of Franklin Global Real Estate and Infrastructure Securities.

"Investors can build a real estate portfolio that has geographic and sector diversification by investing in a few selected REITs," Magee says.

With a REIT, he says, you can buy into a big property you could never afford with a direct investment, and REIT management minimizes costs with economies of scale.

Whatever approach you take to real estate investing, most experts recommend dipping a toe rather than plunging in, so you'll survive if things go wrong or the hassles become intolerable.

Source: U.S. News & World Report, Jeff Brown
http://money.usnews.com/investing/articles/2016-05-17/how-to-begin-investing-in-real-estate

Should I Use the Value of My House as My Emergency Fund?

Q. I don’t have an emergency fund, but I have always felt very secure knowing I have a zero-balance, low-interest home equity line of credit that would allow me to get, on an emergency basis, close to three times my annual salary. Is this a legitimate substitute for a separate emergency fund? — Curious

A. A home equity line of credit (HELOC) is one kind of backup plan, but it’s not a foolproof kind of backup plan.

A traditional emergency fund covers anywhere from three months to a year’s worth of expenses, depending on your personal needs. The money is usually kept in a safe and liquid account.

Chip Wieczorek, a certified financial planner with Tradition Capital Management in Summit, NJ, said it’s not advisable or realistic to keep two or three years of living expenses in a savings account with a near 0% yield.

However, he said, home equity lines have pitfalls.

“I advise clients to maintain three to six months of living expenses in a savings account in addition to establishing a home equity line of credit for large unexpected expenses,” he said.

Wieczorek said when using a line of credit as an emergency fund, you must be aware that lines have a draw period and a principal pay down period.

A typical HELOC has a seven- to 10-year draw period during which the client can access funds and make interest-only payments based on a 20- to 30-year amortization schedule. After the draw period expires, funds can no longer be drawn from the line of credit and both principal and interest payments are required.

“You may think you have two to three years of salary accessible from your line of credit, but if the draw period expires, your emergency fund has dried up,” Wieczorek said. “Most people do not realize this and should review their HELOC terms on an annual basis.”

Also keep in mind that home equity lines are variable and can be frozen by a bank. The interest rate for the line is generally based on an index such as the prime rate, Wieczorek said.

“This means that the interest rate can increase over time, which would increase your monthly payment as well,” he said.

Also, in 2008, major home equity lenders began informing borrowers that their home equity lines of credit had been frozen or restricted.

“Falling housing prices led to reduced equity for borrowers, which was perceived as an increased risk of foreclosure in the eyes of lenders,” he said. “Courts have held that a bank may freeze a HELOC in instances where a home’s value decreases substantially.”

Jerry Lynch, a certified financial planner with JFL Total Wealth Management in Boonton, also referenced 2008 as a problem for many home equity line borrowers.

“It is very possible that the condition that requires you to tap into that credit line—you lost your job or got hurt—may make the bank close the credit line,” he said.

Lynch said a mortgage and a home equity line is not a loan on a home, but instead is a loan on your income.

“If that can be shut down, and that was your plan, you need a better plan,” he said. “Plan A never works. What’s your Plan B and C?”

Consider going a more traditional route over time and build the kind of emergency fund you can always count on.

[Editor’s Note: If you plan on opening a home equity line of credit, make sure your credit score is in good shape, as it will be a major factor in determining the interest rate you’ll pay. You can check your credit scores for free on Credit.com.]

Source: Realtor.com, Karin Price Mueller
http://www.realtor.com/advice/finance/should-i-use-the-value-of-my-house-as-my-emergency-fund/?iid=rdc_news_hp_carousel_theLatest

Mortgage Payments When You Are In Financial Trouble

None of us can appreciate -- nor anticipate -- the future. Although we always believe it will never happen to us, once in a while, calamity strikes, and then we have to address these very hard and difficult questions.

You own a house, with a sizable mortgage. Suddenly, you (or your spouse) lost their job, and you cannot make the monthly mortgage payments.

There are a number of options you should immediately consider. However, the very first thing you should do is to talk with your lender. Don't just discuss your issues with a low-level employee. Try to go as high up the corporate ladder as you possibly can. And don't be afraid to be honest. Legitimate mortgage lenders will try to work with you, since they don't want to evict you and have to own and carry your house until they sell it.

Here are some of the options which are available to you.

1. Temporary indulgence. Here, the lender, at your request, may grant you a short period of time -- usually not more than three months -- in order to cure any delinquency. However, this is merely temporary relief, and by the end of that short period of time, the borrower must be completely current.

2. Repayment plan. Here, the borrower is given a fixed period of time -- usually not to exceed one year -- in which to bring the mortgage current by immediately making and continuing to make payments in excess of the monthly mortgage payment. It is important to get this repayment plan reduced to a written document, signed by both the lender and the borrower.

3. Special forbearance relief agreement. Here, the regular monthly mortgage payments are suspended or reduced for a period of up to eighteen months from the due date of the first unpaid monthly installment. At the conclusion of this relief period, the regular payments must be resumed; additionally, a comprehensive plan must be agreed upon for the repayment of the amount that has been suspended.

In this case, the lender will make a determination that the default is curable, and based on the current financial and appraisal data, the lender must be satisfied there is a likelihood that the borrower will be able to comply with the repayment plan. Clearly, the burden will be on you to document and justify the plan, so as to satisfy the lender's requirements.

If you are in the military, the Soldier's and Sailor's Relief Act provides various forms of relief, but you should check with your military or civilian lawyer to determine your eligibility under that Act.

4. A short sale. Here, the lender will authorize you to sell the property for what it is really worth, and the lender will get all the proceeds. Let us look at this example. The house can probably be sold at $395,000, but the mortgage is $425,000. The lender may allow you to sell the property for $395,000, giving a real estate broker a commission. The lender gets all the remaining sales proceeds; you get nothing from the sale. However, under this "short sale" approach, you will be relieved of your mortgage. In some cases -- depending on your financial situation -- the lender may want you to pay a portion of the mortgage shortfall; this depends on the lender and is clearly negotiable.

5. Deed in lieu of foreclosure. This is another remedy that may be available to you. Under this arrangement, you deed your property to the lender (or to whomever the lender designates) and this is in lieu of (instead of) foreclosure proceedings. This arrangement is an acceptable and customary procedure when, for example, the borrower is deceased and the estate is willing and able to transfer the property, or the borrower has filed Chapter 7 bankruptcy, and the trustee has abandoned interest in the property.

6. Foreclosure. Here, the lender will sell your property at auction (or in some states at the Courthouse), and you will lose your home and your credit rating (whatever is left of it. Legitimate lenders do not want to foreclose. and they will reluctantly start the process if all else has failed.

7. Bankruptcy. Your final option, of course -- which should be used only as a last resort -- is for you to file bankruptcy. When someone files for bankruptcy, there are many protections that automatically apply from the day the bankruptcy petition is filed with the Bankruptcy Court. The most important protection under the bankruptcy law is known as "the automatic stay." If you are in bankruptcy, no legal action can be taken against your house unless the lender requests the Court for permission to "lift the stay."

You cannot ignore your financial problem, hoping you will win the lottery or find some other immediate source of funds. The level of your cooperation is the most significant aspect that will determine how willing the lender is to similarly cooperate.

Source: RealtyTimes, Benny L. Kass
http://realtytimes.com/consumeradvice/mortgageadvice1/item/43937-20160420-mortgage-payments-when-you-are-in-financial-trouble

7 Times You’ll Need Extra Paperwork to Get a Mortgage

When you apply for a mortgage the first time, or if you’re a little rusty on the process, it’s reasonable to expect some shell shock when you’re told what documentation you need to gather, as there’s often quite a bit of it. If you plan to buy a home in the near future, a good best practice is to save all paperwork just in case it’s something you end up needing.

Some of the initial information lenders may ask for includes:

• Tax returns for the past two years
• W-2s for the past two years
• Pay stubs from the past 30 days
• Asset reports for the past 60 days

These are the basic essentials, although you may be asked for other items, such as:

• A financial paper trail
• Specific dates on previous derogatory credit events
• A marital settlement agreement (MSA) from a previous divorce
• Any missing pages of bank statements
• Any missing pages of tax returns
• Details outlining anything that appears inconsistent

It is a good idea to provide the financial documentation to a lender as quickly as possible. Any delays in submitting these documents may postpone your interest rate lock as well as your ability to perform on your real estate contract. (Remember, a good credit score can help you qualify for the best terms and conditions on a mortgage and even help you afford a bigger mortgage. You can see where you currently stand by viewing your two free credit scores, updated each month, on Credit.com.)

To help you establish what other information you might need, consider the following.

1. You have undocumented money

If you have additional deposits in your bank account, other than your income, you will need to paper trail and source them, whether you plan to use that money for the loan or not. Lenders cannot ignore money in your bank account that cannot be documented.

2. You’re divorced

If you were divorced, even as long as 10 years ago, a lender may ask for a copy of the full divorce decree with all pages and schedules, including the marital settlement agreement. Even if you mark the “single” box on the mortgage application, lenders run a background check and will see any previous marital statuses, addresses, or names. If you didn’t provide a divorce decree upfront, lenders will likely ask for one after the background check.

3. You’re not a U.S. citizen

Two instances when you’ll be required to provide your birth certificate are if you are unable to provide picture identification or if you note on the application that you are not a U.S. citizen. In these instances, an underwriter will generally sign off on your loan without the supporting document. One way to prevent unnecessary holdups related to your birth certificate is to go over all raw data on the loan application and make sure you answered all of your declarations questions correctly.

4. You’ve been through a short sale

The final settlement statement from the transaction is critical. Many mortgage loan programs have a waiting time to be eligible for new financing.

5. You’ve been through a foreclosure

You’ll want the date of the trustee sale. This is usually accomplished by obtaining a copy of the trustee’s sale date deed from your local recorder’s office.

6. You’ve filed for bankruptcy

If you filed for Chapter 7 or even Chapter 13 bankruptcy, you’ll need all the pages and schedules, including the schedule of creditors specifically identifying everything associated with the discharge. The discharge date is the date at which the waiting time starts to secure new mortgage loan financing. Even if you’re already past the date, but you don’t have all the Chapter 7 paperwork, your new loan process for buying a home can be put on hold until you have all of the appropriate documentation.

7. You’ve had a loan modification

You will need the full loan modification agreement you signed with your original loan servicer when you apply for a new mortgage.

Lenders do not intentionally try to make you provide more paperwork when buying a home. Based on your financial picture it might be necessary in order to meet federal compliance regulations all lenders must abide by. If anything identified above exists in your past or your financial picture is unique, make sure to have supporting documentation and a seasoned loan professional (full disclosure: I am one) working in your best interests.

Source: Realtor.com, Credit.com - Scott Sheldon
http://www.realtor.com/advice/finance/7-times-youll-need-extra-paperwork-to-get-a-mortgage/?iid=rdc_news_hp_carousel_theLatest

INFO GRAPHIC - Has Money, Will Buy?

6 Times You Really Can Get Your Earnest Money Back

In real estate, the importance of being earnest is measured not by a handshake and a “Sure, we’ll buy your house,” but cold hard cash—aka earnest money. That’s the deposit that you, dear home buyer, put down once you agree to purchase a place (typically 1% of the home’s price) and that you stand to lose if you back out of the deal for no good reason.

While this safeguard serves to keep fickle buyers from changing their minds unnecessarily, there are plenty of times when you can—and should—bail with your earnest money firmly in hand.

Here are six good reasons to walk away that won’t force you to forfeit this chunk of money.

1. The house was appraised for less than expected

One surefire way to get your earnest money back is to have an appraisal contingency. Your lender will want to have the property appraised to see if it’s really worth what you agreed to pay for it. If the estimate is lower, the lender will loan only up to the lower amount—which means it’s up to you to cover the difference. But with an appraisal contingency, “the buyer only has to buy the home at the appraised value,” says Joshua Jarvis, a Realtor® in Atlanta.

An appraisal contingency gives you leverage to ask the seller to lower the price or to sweeten the deal by, say, paying your closing costs. But if no agreement is reached, then you can take your earnest deposit and skedaddle.

2. Your financing fell through

If you can’t find a lender who will loan you money within a certain amount of time, a financing contingency allows you to get your money back. Normally you have to be flat-out denied financing by the lender in order to get a refund; in other words, you can’t bail scot-free because you didn’t like the interest rates offered.

A typical time frame to find financing is “often two weeks from date of the approved contract,” says Doris Phillips, a Realtor and broker with Lake Homes Realty in Pelham, AL.

3. Your other house didn’t sell

It’s hard to buy a home if all your money’s tied up in your old one—which is why many buyers in this all-too-common scenario have a sale contingency in their contract: They will buy the new place only if they can unload their old digs within a specific amount of time. How much time that is depends on how quickly homes move in your market, so consult your Realtor for more specifics. But the nice thing is, as long as you’ve got this contingency in place, if your old home doesn’t sell, you can back out of your new purchase without losing anything but time.

4. You find out the home has a major flaw

Most sales are contingent on a home inspection—that’s where an inspector checks out the house, soup to nuts, and identifies any problems. While many flaws can be fixed and the deal can go through, there are some doozies that should give you major pause. They include a history of problems with mold, foundation, electrical, pollution, and flooding. If your home inspection unearths these problems, you can either negotiate to pay a lower price (since you’ll have to pay for repairs) or abort the mission and take your earnest money with you.

Also keep in mind that sellers are legally required to reveal certain flaws (which vary by state) in a disclosure document. So if you find out a seller has tried to cover something up—and that something is big—it is typically well within your rights to take your earnest money and run.

5. The house isn’t finished

Sounds weird, right? But it’s something you should keep an eye out for if you’re buying a new build.

“Builders are notorious for not delivering a finished product, and the buyer has every right not to close for what they are paying for,” Jarvis says. “I had one where the builder wanted the buyer to close even with an unsafe deck.” In that instance, the buyer would have been able to back out and get the earnest money back, but eventually the construction company fixed the problem (after firing the deck builder).

6. The seller backs out

This may be a no-brainer but just in case you’re wondering: You’re entitled to your earnest money “if the seller backs out for whatever reason,” says Lynn Windle, a Realtor in Plano, TX. Perhaps the most common scenario for this is when you’ve got a sale contingency, but while you’re waiting to sell your home the sellers decide to take another offer. But sellers can bail for all kinds of reasons, and whatever they are, rest assured, your earnest money is all yours.

Keep in mind, though, that it all depends on your contract: If it says your earnest money is nonrefundable, then you’re probably not getting it back without a lawsuit.  If it is refundable, you’ll then need to get a release of contract and disbursement of earnest money form signed by all parties—here’s an example of one.

Source: Realtor.com, Craig Donofrio
http://www.realtor.com/advice/buy/reasons-to-get-your-earnest-money-back/

Tax Tips for Rental Property Owners

It’s tax season again. If you own a rental property, your tax strategy is more complex than for the home you live in. Here are some important tax tips for rental property owners.

Rental property tax considerations each year

Here are some points to keep in mind when you file your annual return:

• Your rental property shows up on Schedule E of your tax returns, which logs rental income and expenses. The expenses include mortgage interest, property tax, maintenance, repairs, utilities, property management fees, depreciation, and all other costs associated with owning the property.
• If you pay points when you close your rental property purchase loan, you cannot fully deduct them the year they were paid like on a primary residence purchase. Instead, you must deduct points over the life of your loan.
• If your rental income exceeds expenses each year, the income is taxable just like any other income.
• If expenses exceed rental income on Schedule E — which is common because of the depreciation expense line item — you can deduct rental losses if your non-property income is up to $150,000 per year. If your non-property income is up to $100,000, you may be able to deduct rental property losses up to $25,000 annually. If you earn between $100,000 and $150,000, this potential deduction benefit is cut in half. And if you earn above $150,000, you cannot deduct rental property losses.
• If you earn too much to deduct rental property losses, the losses can accrue as an offset to capital gains taxes when you sell.
• Ask your tax adviser whether deductions or accrual of rental losses fits your tax profile.

Rental property tax considerations when you sell

When you sell a rental property, you will pay capital gains taxes on your appreciation. You must consult a tax adviser to get accurate figures, but here’s a simplified formula for estimating capital gains taxes and net profit on a sale.

Subtract purchase price, cost of improvements you made, and total selling cost (including realtor, title, and local tax fees) from sales price. The resulting number is your capital gain, and you’ll pay federal and state taxes of about 25 to 30 percent (based on your tax profile) on the capital gains.

Let’s see what this formula looks like if you bought a home eight years ago for $200,000 using 20 percent down and a 30-year fixed rate of 6 percent (the rate at the time). A quick mortgage calculator analysis tells us that your balance is now $140,435.

Suppose you made $10,000 in improvements to the home along the way, you earn less than $100,000 per year (so you didn’t accrue any rental losses to offset capital gains), and you’re now selling the property for $300,000. In a county that has a total of 7-percent selling cost (including real estate agent commission, transfer taxes, title, and settlement fees), your estimated capital gains would be about $69,000.

Using the capital gains tax formula above, you’d have about $17,250 to $20,700 in taxes due, and you’d therefore net about $117,865 to $121,315 on the sale.

How to avoid capital gains taxes on rental property

You can avoid this tax hit if your intent is to buy a new rental home immediately after you sell.

You do so with an IRS benefit called a 1031 Exchange, which is named after the IRS code number. This allows you to defer paying the capital gains taxes at closing as long as you identify a new rental property to buy (in writing) within 45 days, and close the new purchase within 180 days of closing your sale.

To get the full tax benefit, the new purchase must be of the same or greater than your sales price, and you must put every penny of net proceeds from the sale into the new purchase.

A 1031 Exchange defers rather than eliminates the tax hit in your sale.

If you plan to convert the new rental property to a primary residence at some point in the future after the exchange, the IRS has no specific rules prohibiting you from doing so. If this is your strategy long term, consult your tax adviser on capital gains tax implications before you enter into your exchange.

Source: Zillow Blog, Julian Hebron
http://www.zillow.com/blog/tax-tips-rental-property-owners-194050/

These 10 Expenses Are Why Realtors Don’t Make The Kind Of Money You Think They Do

People often think when I tell them I am a Realtor that the money is rolling in and I do little work. The fact is that the opposite is usually true. Real estate IS NOT an easy business despite what many think, and the money, well, it can be relatively good, it's not just rolling in.



Much of the general public is oblivious to all the costs associated with being a real estate agent. They mistakenly believe we all drive Benz’s and are grossly overpaid. Nothing could be further from the truth. Carrying a real estate license comes with great expense, and we have to charge our clients accordingly to cover the costs of doing business.

According to Payscale.com, the median yearly salary for real estate agents is $44,488. Most agents don’t even sell five homes per year. With that in mind, there’s a myriad of monthly costs that must be covered, whether we sell a home that month or not.

To demonstrate that it’s not all fancy cars and mansions in the lives of agents, I’ve listed 10 things real estate agents blow their commission checks on which the public has no idea about.

1. Lockboxes:
These little guys, who hang on your door when your home is for sale, are not cheap. Think about it, these are boxes that are destruction proof and operate by satellite. Not to even mention the expensive supra key that you have to buy and have a subscription to, in order to unlock the boxes. Agents who have 10+ listings have thousands of dollars in lockboxes alone.

2. Signs:
An agent can’t sell a home without a sign. Signs aren’t free. Much like lockboxes, when an agent has dozens of signs, they have lots of money invested. The design and shipping alone is hundreds of dollars. Agents use yard signs, open house signs, location signs, sold signs, pending signs, and in the HOA controlled neighborhoods, designer signs. It adds up very quickly.

3. NAR Dues:
The National Association of REALTORS® (NAR) is America’s largest trade association, representing over 1 million members involved in residential and commercial real estate. Not all real estate agents opt to join NAR and become REALTORS®, but the vast majority do. And guess what—NAR wants its money every month. And they don’t take IOUs.

4. MLS Dues:
On top of belonging to NAR, you have to pay monthly to have access to the MLS. The MLS is the source that lists all the homes for sale. Trulia and Zillow don’t have near as much data as the MLS. The MLS charges a hefty monthly fee to list and sell the agents’ homes. It’s very much a necessary tool in the agent toolbox.

5. Marketing Materials:
The agent’s main job is to market. They market properties and themselves. Between websites, business cards, flyers, and belonging to sites like Zillow and Trulia, the average agent will spend almost $1,000/month on marketing materials. Some spend $10,000+ in marketing each month. It’s not cheap to spread the word about a multi hundred thousand dollar asset for sale.

6. Advertising:
Paid ads aren’t cheap. Whether it’s on Facebook, a billboard, or the baby seat in a shopping cart, ads cost a lot of money. They’re the lifeblood of a good agent. That’s how they sell your home—by advertising it.

7. Website Hosting:
If you’re going to sell real estate in this digital age, you need a website. You’ve got to have a place for your prospects and clients to come and search for homes. That website has to feed into the MLS (another fee to do that), and the website has to be responsive. The average custom website costs $5,000 and comes with a monthly charge of $200. You starting to see the pattern here?

8. Open Houses:
You may think that we just sit in your home using up your free wifi, but that’s not the case. Depending on the agent, there’s food involved as well as balloons, signs, ads, and staging—all designed to make the place look and feel like a million bucks. I’ve even paid to have someone mow the yard and trim the bushes before an open house. I didn’t have time to wait on the owner to take action.

9. Closing Gifts:
In most markets its customary (but not necessary) for agents to give a gift to the clients after doing business with them. What most don’t know is that they usually send one to the title company and the loan officer as well. When everyone puts in hard work, the agent wants to reward them so they continue to do so. You may view it as frivolous, but you can never be too nice to title companies and banks. When you need a favor, gifts go a long way.

10. Office Space (often included in an agent’s commission split—read more here)
Most people think that agents have a job with an office. They don’t realize that the broker charges for the office space and the furniture that occupies it. Just know this: Nothing is free in the real estate game. Not even a place to do your work. Agents are nickled and dimed to death. And as you know, commercial office space isn’t cheap.

So next time you’re thinking about hiring an agent, and you think their fees are a little high, think of this list (which is just a fraction of what’s really paid for). They’re all things to facilitate properties getting moved faster and for higher dollar amounts.

It’s not easy, cheap or always fun being a real estate agent, but the smile we see on our clients’ faces when they buy a new home or profit from selling their old one, makes it 100% worth it.


Source: LighterSide of Real Estate, Ryan Stewman
http://lightersideofrealestate.com/real-estate-life/agent-life/10-expenses-realtors-dont-make-kind-money-think

Move Over, Homeowners—Renters Could Get Tax Breaks, Too

Like any other Realtor whose worth their salt, I always tell my buyers that the biggest incentives for buying a home are the tax breaks. It can be argued that not as many homes would have been sold over the years if there were no tax incentives. The IRS does it to encourage home ownership, because it is believed that home owners build better communities.

Now, Representative Alan Grayson of Florida has introduced a bill in which renters will get a tax break for renting. One school of thought is that this will encourage renters to stay renters, and not ever want to buy a home. Another school of thought out there is that this might encourage more home ownership because renters could use the money they get from the tax incentive to put towards a future down payment on a house. 

Who is right? Only time will tell if the bill passes, which it is likely to not pass since it is being introduced by a Democrat congressman in a Republican controlled congress. If the bill doesn't pass, it is likely to be introduced again sometime in the future. 



It’s been said many times: The rent is too damn high. And now a recently introduced bill is trying to cut renters a break—a tax break, that is.

The bill, if it became law, would allow renters to deduct from their federal taxes what they pay for the primary roof over their heads—a proposal that could save them thousands per year.

“There’s an unequal treatment now of owners and renters,” says Rep. Alan Grayson, a Democrat from Florida, who introduced the bill. He hopes this bill would level the playing field .

For example, the average taxpayer shelling out about $1,500 a month (or $18,000 a year) could potentially save $4,500 annually through the deduction if he or she is in the 25% tax bracket, he says.

“Renters should be able to share in the tax savings,” he says. “This is a tax benefit that would go primarily to people who need it.”

About 37% of U.S. households were renters in 2015, according to a recent report from the Joint Center for Housing Studies of Harvard University.

And 49%, or 21.3 million, of renters were considered cost-burdened (that is, they plunked down more than 30% of their paychecks on housing) in 2014. Meanwhile 26%, or 11.4 million, were severely cost-burdened, shelling out more than half of their earnings each month.

“It could be a great boon for renters,” says Mindy Ault, a research associate at the National Housing Conference, a group that supports affordable housing. She notes that rents are steadily rising, but wages aren’t necessarily keeping pace.

Homeowners can currently deduct the interest they pay on their mortgages (up to $1 million) and their property taxes from their taxes. That can add up to $2,500 in savings for those in the 25% tax bracket deducting $10,000 of interest.

Those tax breaks are strong incentives for folks to buy their homes. But if the rental bill was passed, more people, particularly younger individuals and couples, might choose to continue renting instead, says Ault.

“One of the big arguments for homeownership as a means for a family to build wealth are the tax credits,” Ault says.

Many states already have their own tax credit programs for renters, mostly aimed at low-income or elderly residents. But the programs vary widely and aren’t available in each state.

They don’t “reduce your tax obligation the way a mortgage would,” says Fred Tayco, director of government affairs at the National Apartment Association, a trade organization that represents property owners, developers, and builders. And while the programs “may help, [they’re] not as significant as people would think it would be.”

For example, Indiana renters can deduct up to $3,000 from their state taxes if they meet certain requirements. Meanwhile, low-income disabled or elderly Connecticut renters can receive up to $700 if they’re single and up to $900 if they’re married.

But the likelihood of the bill being signed into law is slim, says Linda Couch, senior vice president for policy at the National Low Income Housing Coalition. Proposed laws tend not to get passed the first time they are introduced and this one was proposed by a Democrat in a Republican-controlled Congress, she says.

However, if it did pass, the tax break might actually boost homeownership.

“It could help renters who are looking to become homeowners, because it will lower their housing costs,” Couch says. “That savings could be put toward a down payment.”

Source: Realtor.com, Clare Trapasso
http://www.realtor.com/news/real-estate-news/tax-breaks-for-renters/



Related:
Home sweet homeowner tax breaks
Freshen Up On The 7 Financial Benefits Of Home Ownership This Tax Season

Let’s Get Crystal Clear On How Real Estate Agents Are Paid

So you’re thinking about buying or selling a house? Odds are good that the first thing you did was contact a real estate agent to help you out. According to the 2013 Profile of Home Buyers and Sellers published by the National Association of Realtors, 88% of buyers purchased their home through a real estate agent or broker.

So how exactly do real estate agents get paid?

SHORT ANSWER:

Real estate agents work for real estate brokerages, and they earn money via commissions when they assist buyers and sellers buy or sell homes.

Now let’s dispel a false assumption right off the bat…

REAL ESTATE MYTH – Agents must be rolling in the cheddar. Word on the street is that some of them make 6% or even 7% commission on every house they sell! Not exactly… Most agents are not living the lavish lifestyle you may assume they are. The income is much more modest than you might expect. Real estate agents have a median income of $40,990 with the top performers making more.




LONG ANSWER:

First, let’s go over some terminology.

When brokerages hire real estate agents they typically set them up on what is known as a commission split. This means that when a commission is paid to a real estate brokerage, it’s split between the brokerage and the real estate agent. Some common commission splits are 50/50, 60/40, 70/30 & 80/20. This will vary from brokerage to brokerage and even from agent to agent. There may be a brokerage with 5 real estate agents who all have different commission splits.

Generally speaking, in any given real estate transaction there will be between 1 and 4 real estate agents or brokerages involved in the transaction — all of whom expect to be paid.

Listing agent – This is the person who meets with a homeowner who is interested in selling their home. This person works for a real estate brokerage. This person is then hired by the sellers to sell their home. The sellers signed a contract which explained the amount of money they were going to pay this listing agent’s brokerage to sell their home. This contract is known as a listing agreement.

Listing brokerage – All real estate agents work for real estate brokerages. Every real estate brokerage has a licensed real estate broker who is in charge of the real estate agents working at that brokerage. Every real estate agent you meet will work for a brokerage like one of those mentioned. The brokerage that employs the listing agent is the listing brokerage.

Buyer’s agent – This is the real estate agent who meets a person who wants to buy a home. This agent will show a potential home buyer homes that are listed either by themselves or other listing agents.

Buyer’s brokerage – The brokerage for whom the buyer’s agent works.

It is important to note that these roles can be different in each transaction. A real estate agent can be a buyer’s agent, or a listing agent depending on the deal. A real estate agent can even be both the buyer’s and seller’s agent.

Let’s go over some different scenarios to illustrate how each of these agents and their brokerages get paid.

Scenario A

A buyer wants to buy a home. She meets a real estate agent named Brian. Brian works for The Holton Wise Property Group. Brian is on a 60/40 commission split with The Holton Wise Property Group. Brian takes his buyer to a home that is listed by Carla. Carla works for Century 21. Carla is on a 50/50 commission split with Century 21 and has been hired by the owners of a home on 123 Main Street in Cleveland, Ohio. The price this home has been listed at is $249,900.00 The sellers have agreed to pay the brokerage Carla works for 6% of whatever she can sell the house for.

Brian and his buyer put in an offer on 123 Main Street for $225,000.00 That offer is accepted by Carla’s sellers. Carla’s brokerage is going to get paid 6% of the sales price by the sellers, but why did Brian take his buyer to Carla’s home on 123 Main Street? Who is going to pay Brian and The Holton Wise Property Group?

Answer: Carla and her brokerage.

When Carla was hired by the sellers of 123 Main Street she entered their home into something called the multiple listing service (MLS). This is a website that real estate agents and brokerages use to help their clients buy and sell homes search for homes. When Carla put 123 Main Street on the MLS she offered all other real estate brokerages a share or split of the commission she gets from the sellers of 123 Main Street if they were able get their buyers to buy the house. In this situation Carla and her brokerage offered Brian and his brokerage 50% of the commission for the sale of 123 Main Street.

So let’s see how this whole thing played out.

The house sold for $225,000.00 The sellers agreed to pay a commission of 6% to Carla’s brokerage. That amount is $13,500.00.

Carla’s brokerage agreed to pay 50% of the commission to Brian and his brokerage. Carla is on a 50/50 split with her brokerage and Brian is on a 60/40 split with his.

Here is the breakdown of the commissions earned by all who were involved.

• Total commission paid by the sellers $13,500.00
• Total commission paid by the buyers $0.00
• Carla’s commission $3,375.00
• Carla’s brokerage commission $3,375.00
• Brian’s commission $4,050.00
• Brian’s brokerage commission $2,700.00

Scenario B

As I stated before these roles can change by the deal. There is not always that many people involved in the scenario.

Let’s assume Brian’s buyer did not like Carla’s house. Instead, Brian’s buyer liked a house that Brian had listed himself. This house was also listed for $249,000. The sellers signed a listing agreement with Brian that paid him a commission of 6% of the sales price. Brian’s buyer put in an offer of $225,000.00 that was accepted by the sellers.

Here is the breakdown of the commissions earned by all who were involved.

• Total commission paid by the sellers $13,500.00
• Total commission paid by the buyers $0.00
• Brian’s commission $8,100.00 (60% of the total)
• Brian’s brokerage commission $5,400.00 (40% of the total)

Source: LighterSide of Real Estate, 

http://lightersideofrealestate.com/real-estate-life/how-real-estate-agents-are-paid

The Do's and Don'ts of Home Equity Loans

With home values rising, homeowners who have equity, a much-valued resource, might be tempted to tap some of that wealth and use it for other purposes. But depending on your personal situation and how you’d like to use the equity, it may not necessarily be the right thing to do.

Here’s when a home equity loan, which allows you to use the equity of your home as collateral, makes sense — and when it doesn’t.

DON’T: Fund a lifestyle

Remember a decade ago when homeowners yanked cash out of their homes as if they were bottomless piggy banks to fund affluent lifestyles they couldn’t really afford? These reckless borrowers, with their boats, fancy cars, lavish vacations, and other luxury items, paid the price when the housing bubble burst. Property values plunged, and they lost their homes.

Lesson learned: Don’t squander your equity! A home equity loan should be looked at as an “investment,” and not as “extra cash” when making spending decisions.

DO: Make home improvements

The safest use of home equity funds is for home improvements that will add to the home’s value. If you have a one-time project (for example, you need a new roof), then a home equity loan might make sense.

Need access to money over a period of time to fund ongoing home improvement projects? Then a home equity line of credit (HELOC) would make more sense. HELOCs let you pay as you go, and usually have a variable rate that’s tied to the prime rate, plus or minus some percentage.

DON’T: Pay for basic expenses/bills

This is a no-brainer, but it’s always worth reiterating: basic expenses like groceries, clothing, utilities, and phone bills should be a part of your household budget.

If your budget doesn’t cover these and you’re thinking of borrowing money to afford them, it’s time to rework your budget and cut some of the excess.

DO: Consolidate debt

Consolidating multiple balances, including your high-interest credit card debts, will make perfect sense when you run the numbers — who doesn’t want to save potentially thousands of dollars in interest?

Debt consolidation will simplify your life, too, but beware: It only works if you have discipline. If you don’t, you’ll likely run all your balances back up again, and end up in even worse shape.

DON’T: Finance college

This may seem like an attractive use of home equity for those with college-age children. However, the potential consequences down the road could be significant. And risky.

Remember, tapping into your home equity may mean it takes you longer to pay off the loan. It also may delay your retirement, or put you even deeper in debt. Furthermore, as you get older, it will likely be more difficult to earn the money to pay back the loan. Don’t jeopardize your financial security.

Source: Zillow Blog, Vera Gibbons
http://www.zillow.com/blog/dos-donts-of-home-equity-loans-192836/

Hey, Homeowners! These Little-Known Tax Deductions Can Save You Thousands

Sawayasu Tsuji/Getty Images

You probably already know that owning a home comes with some sweet tax benefits, like the mortgage-interest and property-tax deductions. But did you know there’s a whole list of other homeowner-related tax breaks that you might be leaving on the table?

We’re not talking chump change, either. Homeowners already save an average of $3,000 a year in taxes from mortgage-interest and property-tax deductions, according to the National Association of Realtors. When you add in some of the lesser-known homeowner tax breaks, you could really be amping up the savings—and beating the IRS at its own game.

Back in December, Congress passed the Protecting Americans From Tax Hikes Act of 2015, which extended many exemptions that were about to expire and made others permanent. But to reap the benefits, you first have to know about them.

So, here we go! Check out these common—and not-so-common—homeowner deductions that you should take advantage of this year:

1. Mortgage interest deduction

If you’ve taken out a loan to buy a house, you can deduct the interest you pay on a mortgage, with a balance of up to $1 million. To access this deduction, you will have to itemize rather than take the standard deduction. The savings here can add up in a big way. For example, if you’re in the 25% tax bracket and deduct $10,000 of mortgage interest, you can save $2,500.

Of course, there are some limitations. For example, if you’re helping a family member pay his or her mortgage, you can’t deduct that interest on your tax return.

2. Private mortgage insurance

Qualified homeowners can deduct payments for private mortgage insurance, or PMI, for a primary home. Sometimes you can take the deduction for a second property as well, as long as it isn’t a rental unit. Here’s the catch: This only applies if you got your loan in 2007 or later.

Another restriction: This deduction only applies if your adjusted gross income is no more than $109,000 if married filing jointly or $54,500 if married filing separately.

3. Property taxes

You can include state and local property taxes as itemized deductions. An interesting note: The amount of the deduction depends on when you pay the tax, not when the tax is due. As a result, paying property taxes earlier could have a positive impact on your return.

4. Capital gains on a home sale

The dreaded capital gains tax can be avoided when the gain from selling your personal residence is less than $250,000 if you are a single taxpayer or $500,000 if you are a joint filer. To qualify, you must have owned and used the home as a primary residence for at least two years out of the five years leading up to the sale.

5. Medical improvements

If you’ve made improvements to your home to help meet medical needs, such as installing a ramp or a lift, you could deduct the expenses—but only the amount by which the cost of the improvements exceed the increase in your home’s value. (In other words, you can’t deduct the entire cost of the equipment or improvements.)

“A lot of this comes down to fact and circumstance,” says Gil Charney, director of The Tax Institute at H&R Block. “For example, if you’ve recently installed a heated therapy spa or hot tub in your home, you may be able to deduct the expense if there’s also evidence that, say, a physical therapist visits your home three times a week and you’re over a certain age.”

6. Home office

If you have a dedicated space in your home for work and it’s not used for anything else, you could deduct it as a home office expense.

“It doesn’t have to be an entire room,” Charney says. “It can just be a dedicated space.”

7. Renting out your home on occasion

If you rented out your home for, say, a major sports event like the Super Bowl or the World Series, or a cultural event such as Mardi Gras, the income on the rental could be totally tax free—as long as it was for only 14 days or fewer throughout the course of a year.

8. Discount points

Discount points, which are paid to lower the interest rate on a loan, can be deducted in full for the year in which they were paid. In addition, if you’re buying a home and the seller pays the points as an incentive to get you to buy the house, you can deduct those points, Charney explains.

9. Energy-efficiency tax credit

You can take advantage of an energy-efficiency tax credit of 10% of the amount paid (up to $500) for any green improvements, such as storm doors, energy-efficient windows, and air-conditioning and heating systems.

10. Loan forgiveness deduction

If you’re the owner of a foreclosed or short-sale home, you can take advantage of mortgage-debt forgiveness. For example, if you make a short sale of your primary home at $250,000 but owe $300,000 on your mortgage, the lender will forgive the extra $50,000 owed—and you don’t have to pay taxes on that amount.

For more tax tips, check out IRS Publication 530 for a list of what homeowners can (and cannot) deduct.

Source: Realtor.com, Renee Morad
http://www.realtor.com/advice/finance/these-little-known-tax-deductions-can-save-you-thousands/?iid=rdc_news_hp_carousel_theLatest