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Ask an Expert: Mortgages, Part 3By ADMIN
Eric Tyson, M.B.A., a syndicated columnist and the best-selling co-author of “Home Buying for Dummies,” “House Selling for Dummies” and “Mortgages for Dummies,” answered selected readers’ questions about mortgages.
He is no longer accepting questions.
What should you do if you lose your job or come into a financial crisis and find you cannot make mortgage payments? Should one plan for such a contingency and if so, how?
Joshua in New York
The possibility of facing a financial crisis is the main reason why you shouldn’t overextend yourself with mortgage debt when buying a home or refinancing. I’ve long advocated reviewing your entire budget and spending patterns to see the expected impact of a proposed home purchase or refinance before signing on the dotted line. Too often, folks simply go ahead with a mortgage after they’ve been told that they can qualify for it. Qualification doesn’t mean that you can truly afford it given the other aspects of your personal and financial situation. In addition to analyzing your spending, another way to plan for a financial emergency is to have a reserve of money to tide you over. I generally recommend having at least three to six month’s worth of living expenses accessible in a money market fund. If you have an especially unstable job situation and no family to rely upon in a financial crisis, having a year’s worth of expenses may be necessary.
I am in the process of selling a home and acquiring a new one. My credit is excellent. I understand that banks are raising interest rates and tightening credit, but I am under the impression that an “excellent credit” customer must be attractive to lenders these days.
What would you recommend I do to make sure I get the best possible deal?
Prospective mortgage borrowers with good credit scores are much coveted by lenders today. The most important thing that you can do is get your current home ready to sell. The keys to getting top dollar for your house and selling it efficiently are to get it cleaned up to sell and priced right. Interview several real estate agents and as part of the interview process, ask each of them what work they suggest doing to get the house ready to sell (e.g. painting, clutter removal, etc.). Each agent should prepare an analysis showing you what your house is likely worth based upon the recent sales of comparable homes. If you decide to try and sell your house yourself, this interview process should aid your future selling plans. In terms of you qualifying for your next mortgage, I suggest getting pre-approved with a lender of your choosing after considering a number of lenders in your area.
Do you think it’s possible that the mortgage interest tax deduction will be eliminated in the future? If not entirely, do you think it will be eliminated for homes over one million which would really impact NYC?
This is a common concern that increasingly gets voiced when major changes to our nation’s tax laws are discussed as they are during this Presidential election year. I don’t think the mortgage interest deduction is in jeopardy of being eliminated from our tax code. Tens of millions of homeowners who bought homes counting on and factoring in the deduction would rightfully be outraged and no politician will dare incur that wrath. Current tax law limits the mortgage interest deduction to the amount of interest on $1,000,000 borrowed (and up to $100,000 on a home equity loan). These amounts have been fixed now for many years (and may be adversely affecting high cost housing) and frankly need to be indexed for increases in the cost of living. I don’t see them being reduced.
I am not the only one in the country who owns a home outright. No mortgage. I don’t worry about the mortgage issue directly but have questions that I’ve not seen answered. How many people own homes outright? What is it as a percentage? (It’s like stating what “average” credit card debt is, it means nothing without perspective.) More importantly – the mortgage crisis does affect me, particularly if I am asked to finance a bail-out of any kind. Is there a possibility that a bail out can be financed as a mortgage cost so that I don’t have to be responsible for either side?
About one-third of Americans owns their home free and clear of a mortgage. While you may not need to be in the marketplace for a mortgage, if you’re a taxpayer, you will pay some price for the mortgage and housing industry problems and government assistance and intervention.
If someone can afford to put 100% down (buy a house outright), are there any advantages to getting a mortgage with a reasonable interest rate? Does having a third party bank with a stake in the condition and purchase price of a house protect the buyer at all during the purchase process?
There can be advantages to not paying all cash for a home (and taking out a mortgage) if you have other investment opportunities. Perhaps you want to invest in other real estate or a small business. If you can borrow mortgage money at 7 percent and get a higher return than that investing elsewhere, that’s a good reason to consider taking out a mortgage. Recognize though that any investment producing high enough returns entails a fair amount of risk and may not end up producing the higher expected returns. Another reason to take out a mortgage and conserve some of your cash is the issue of liquidity and having money available for unexpected emergencies.
Having a third party bank with a stake in your transaction can provide some protections. For example, they would insist on title and homeowner’s insurance which some foolish buyers might choose to not obtain. Lenders also insist on an appraisal which may help to ensure you’re not overpaying based upon current market values.
What’s your take on a 7 year interest only loan. If that saves, $1k a month, that’s $84k you could invest elsewhere, and almost any home value will rise a little bit in 7 years.
Michael in Los Angeles
Well, that’s the kind of thinking that led many folks into risky interest only loans during the frothy real estate market and those are the types of loans on properties ending up in foreclosure. While it’s generally true that most real estate rises in value over 7 years, that’s not always the case. To consider this interest only loan, you must be 100 percent sure of being able to handle the much higher payment in seven years when you must begin making regular payments including principal. Also, be clear that you’re not “saving” $1,000 per month – you’re simply putting off paying principal.
What do you think about the future of the refinance market since the meltdown of primary mortgages? Will I be paying for everyone else’s lack of planning if I refi in the next 4 years?
The days of easily tapping a large portion of your home equity are gone – until the next lending orgy cycle. But, let’s be clear what types of mortgages went bad in recent years. It’s not primary mortgages broadly as you say but a portion of so-called sub-prime mortgages. About one in five mortgages originated in the mid-2000s were sub-prime. Now, less than three percent of new originations are sub-prime. The weakest lenders and mortgage brokers have gone under or will soon go under and with that shakeout, while there may be less choice, there will still be plenty of places to shop among. Strengthening your credit score before refinancing should qualify for the best rates so if it looks advantageous to refinance, don’t wait.
Is this a good time to turn a primary residence into a rental property? If we can recover our costs from year to year, from the rent received and the tax benefits (depreciation, deductible expenses and mortgage interest), is real estate a good investment now? Over, say, a 10 to 20 year period, what sort of appreciation might we expect? Or instead should we take our money out of real estate and run. This is a stable residential community outside of Boston. Thanks.
Real estate should continue to be a good long-term investment. The recent down market in most parts of the country doesn’t change that. As with the stock market, it’s not a straight path higher – corrections inevitably interrupt advancing markets. Converting your home in a rental property appeals to folks needing or wanting to move since you already own and know the property. One downside to consider is if the fine appointments in the home are suited to the expected wear and tear of renters. Also, be sure to run the numbers to see what kind of monthly cash flow or drain you can realistically expect as a rental. Finally, consider tax issues especially the fact that you will lose being able to sell and exempt a hefty amount of your home’s capital gain if you convert it to a rental for a number of years.
I bought a modest house ($145,000) in early 2006 with no money down on a 30-year fixed-rate mortgage with a 15 year balloon. It is my first house and I make the payments with no problems and even manage to save a bit. I currently pay extra so that should I live here for 15 years, there will be no balloon. My problem is that I will have to move in two years. Property values in the Lansing area have dropped dramatically and are being driven down by foreclosures. I am upside down. In two years, I can easily see myself selling at a loss of $20K+ (more if a realtor is involved). I don’t have $20K lying around. What are my options?
Steve in East Lansing, MI
You should stop making extra payments because that could limit your options and make some options less attractive. If you have to move in two years and at that time the property is worth less than you owe on it, consider renting the property and holding onto it. Another option although probably less feasible is to change your relocation plans and find a way to stay put. If you must move and don’t want to keep the property, you could borrow from a relative or friend to put cash into making the sale. The final option would be to reach out to the lender and negotiate with them to accept less than you owe on the mortgage. This would likely tarnish your credit score and ability to get credit in the subsequent years.
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