News Channel Mortgage

New law has two different tax breaks you should know about
by Colin Lovett - PIC Current Producer

In our previous post, we discussed the program in the new housing law that could help those facing foreclosure. But as noted last week, the law has treats for everyone, including two new ways to cut your taxes.

The first is a credit for first-time homebuyers.  If you buy a home between April of 2008 and July of 2009, you can get a tax credit up to $7,500.  

Tax credits are great, as I'll explain below, but this one has a catch.  It's really a loan. Two years after you take the loan, you have to start paying it back in the form of extra tax payments for 15 years. It's an interest-free loan, but it does add to your debt.

Buyers should only take this credit if they really need the money to buy the house.  

The other big tax treat is a new property tax deduction for those who file simple returns (1040 EZ). This is a one time deduction of $500 for singles and $1,000 for married couples who pay local property taxes.  So if you pay property taxes but can't usually deduct them from your federal taxes, this is a freebie.

As I said before, there is a big difference between tax credits and deductions.  A credit, as opposed to a deduction, drops your overall tax bill by a certain amount.  A deduction only lowers the amount of income you pay taxes on.

For example, say you earned $40,000 and owe $3,000 in federal taxes.  With a $3,000 credit, you would suddenly owe no taxes.  With a $3,000 deduction, you would only be taxed on $37,000 in income, lowering you tax bill by a few hundred dollars.

I'd love to hear your questions or comments about the housing law.  Submit a comment to this post and I'll respond.

For more information on housing or taxes, please visit our sister site, The Beehive.

For more on the tax breaks in the housing law, please visit:

The Color of Money by Michelle Singletary

Your Money by Sandra Block

Consumer Smarts with Phuong Cat Le

The New York Times: Your Money

What is this?

If rents rise, and prices fall, won’t there be an equilibrium point

Won’t happen. I don’t know of ANY situation where there has been significant drops in housing prices at the same time that rents were rising. The Seattle market just hasn’t seen that much of a drop in real-estate prices yet, and thus there is no big hit to rents.

In fact, rents always seem to rise right at the apex of the real-estate market: when renters start to decide prices are too expensive yet sellers aren’t feeling enough pain to start renting their homes out to stop the bleeding. But you take any market that has seen 20% plus drop in prices and their rental market is hurting from all the shadow inventory coming to rentals.

Data released today indicates that the US economy experienced negative growth in the final quarter of 2007 and underperformed last quarter relative to expectations.  On this news, the Dow is down nearly 100 points and the yield on the 10 Year Treasury has dipped under 4.00%.  Not surprisingly, mortgage rates have improved.  "No-point" 30 year fixed rate pricing is now near 6.5%, down from just shy of 6.7% earlier in the week.

Sniglet:

I’m not convinced that “Demand Destruction’ will rule the day, but it sure is a theory to watch.

I have been pondering a question regarding home valuation vs rents, and I suspect that I might find more data from the good writers here.

One: I suspect that rents are on the rise, at least in areas of decent employment and desirability, and where there is not a glut of rentable housing.

Where can we find rental cost data?

Two: If rents rise, and prices fall, won’t there be an equilibrium point, where either investors swoop in, or renters become buyers? Where is that historical equilibrium point?

Three: Since the costs to investors (interest, primarily) will change, how will that affect that equilibrium point?

Of course, the investor question is not the only thing affecting home values, but it has to be a factor, especially since investors may be the ones that signal the bottom of the market.

Just wonderin’ out loud…..

Hi Greg, I’m assuming when they file their taxes and receive their refund. However, it will also be repaid by the borrower. So while it’s a credit by taxpayers, since it will be repaid back to the Gov, it this really “sponsored” by taxpayers?

Oooh, so many comments!

I don’t have any more data than I provided in previous comments regarding Nehemiah default rates. The actual number may be smallish, as FHA was in scant use until this year.

I seriously doubt it was a factor in the run up in prices.

The new government down payment assistance for first time home buyers (an up to $7,500 interest free tax credit really), seems at first glance to be so complicated, and narrowly targeted that it will likely be irrelevant. Window dressing, I think.

The real separator is this:

A borrower who can EITHER save up a 3 % (now 3.5%) down payment on their own, OR convince a family member, employer, or charitable organization to GIFT the down payment.

vs.

A borrower that cannot.

The former seem like folks who would try very hard to honor their commitments, thru good times and bad.

Rhonda,
I just reread the government offering.

It is a tax credit.

Still sponsored by the taxpayer.

Do you know any of the details on when and how the credit will come back to the borrower?

The new $7500 tax credit for first time buyers can be used to help raise down payment funds.  Here's how:

FHA financing now requires a minimum down payment of 3.5%.  On a $350k purchase that is $12,250.  But FHA guidelines allow a buyer to borrow money from family for down payment.  This means that a first time buyer could borrow the down payment, then make a purchase, then use the tax credit to pay back all or a portion of the borrowed funds. 

Anyone interested in this strategy needs to keep in mind that the tax credit is required to be paid back over the following 15 years, so it is not free money.  But it is interest-free and that is not too bad.

Refinance PA Refinance Pennsylvania Free Refinancing Quote

Refinancing refers to the replacement of an existing debt obligation with a debt obligation bearing different terms. The most common consumer refinancing is for a home mortgage.

Advantages

Refinancing may be undertaken to reduce interest costs (by refinancing at a lower rate), to extend the repayment time, to pay off other debts, to reduce one's periodic payment obligations (sometimes by taking a longer-term loan), to reduce or alter risk (such as by refinancing from a variable-rate to a fixed-rate loan), and/or to raise cash for investment, consumption, or the payment of a dividend.

In essence, refinancing can alter the monthly payments owed on the loan either by changing the loan's interest rate, or by altering the term to maturity of the loan. More favourable lending conditions may reduce overall borrowing costs. Refinancing is used in most cases to improve overall cash flow. Therefore making your bills/payments lower than before.

Another use of refinancing is to reduce the risk associated with an existing loan. Interest rates on adjustable-rate loans and mortgages shift up and down based on the movements of the various indices used to calculate them. By refinancing an adjustable-rate mortgage into a fixed-rate one, the risk of interest rates increasing dramatically is removed, thus ensuring a steady interest rate over time. This flexibility comes at a price as lenders typically charge a risk premium for fixed rate loans.

In the context of personal (as opposed to corporate) finance, refinancing a loan or a series of debts can assist in paying off high-interest debt such as credit card debt, with lower-interest debt such as that of a fixed-rate home mortgage. This can allow a lender to reduce borrowing costs by more closely aligning the cost of borrowing with the general creditworthiness and collateral security available from the borrower. For home mortgages, in the United States, there may be certain tax advantages available with refinancing, particularly if one does not pay Alternative Minimum Tax.

Risks

Most fixed-term debt contains penalty clauses (known as "call provisions") that are triggered by an early payment of the loan, either in its entirety or a specified portion. In addition, there are also closing and transaction fees typically associated with refinancing debt. In some cases, these fees may outweigh any savings generated through refinancing the loan itself. Typically, one only rationally considers refinancing if the potential for a substantial cost savings exists, or if there is a need to extend the loan due to weak cash flow or other non-recurring commitments. In addition some refinanced loans, while having lower initial payments, may result in larger total interest costs over the life of the loan, or expose the borrower to greater risks than the existing loan, depending on the type of loan used to refinance the existing debt. Calculating the up-front, ongoing, and potentially variable costs of refinancing is an important part of the decision on whether or not to refinance.

Points

Refinancing lenders often require an upfront payment of a certain percentage of the total loan amount as part of the process of refinancing debt. Typically, this amount is expressed in "points" (also sometimes called "premiums"), with each "point" being equivalent to 1% of the total loan amount. Therefore, if the refinance option selected involves paying three points, then the borrower will need to pay 3% of the total loan amount upfront. Most refinancing lenders offer a variety of combinations of points and interest rates. Paying more points typically allows one to get a lower interest rate than one would be capable of getting if one paid fewer or no points. Alternately, some lenders will offer to finance parts of the loan themselves, thus generating so-called "negative points" (also called discounts).

The decision of whether or not to pay points, and how many points to pay, should be taken in consideration of the fact that with points, one tends to trade a higher upfront cost in exchange for a lower monthly premium later on. Points can be paid out of the cash saved by refinancing the loan in the first place.

Types

No-Closing Cost

Borrowers with this type of refinancing typically pay few upfront fees to get the new mortgage loan. In fact as long as the prevailing market rate is lower than your existing rate by 1.5 percentage point or more, it is financially beneficial to refinance because there is little or no cost in doing so.

However, what most lenders fail to disclose is that the money you save upfront is being collected on the back through what's called yield spread premium (YSP). Yield spread premiums are the cash that a mortgage company receives for steering a borrower into a home loan with a higher interest rate. The latter will even eventually lead to borrower's overpaying.

Cash-Out

This type of refinance may not help lower the monthly payment or shorter mortgage periods. It can be used for home improvement, credit card and other debt consolidation if the borrower qualifies with their current home equity; they can refinance with a loan amount larger than their current mortgage and keep the cash difference.

orignal story from wikipedia.org

Jack,

Here’s a video discussion of two friends of mine, Saul Klein and John Reilly, regarding the recent decision.

http://www.realtown.com/about/resources/InternetListingDisplayResource

I see a couple of conflicting points regarding “who can be a member of an mls” and will listen to the video of John and Saul discussing this before commenting further.

The VOW/ILD/IDX is confusing and almost too confusing to put into lay terms.

The “opt out” part is relatively simple and is basically what started the suit. Broker J says I won’t show “discounter’s” listings on my site and he can’t show mine. That was the beginning of the problem. But the issue of WHO can be a member of an MLS is more significant to me, as it appears that Saul and John are saying that sites like Estately.com (Galen’s award winning site) where they do not actively list property for sale…could be engangered under the settlement.

So I have to do a bit more research on this…but remember, our mls is not necessarily affected by this case, as we are not an mls that is actively controlled by the Board of Realtors and is a separate entity.

I will listen to the discussion on the video and suggest you do the same.

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