Must I have a mortgage loan pre-approval before choosing a home to buy?

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Is it necessary to a mortgage loan pre-approval before choosing a home to buy?

The legal answer to that question is no. There is no law or regulation that requires a prospective buyer to become pre-approved before viewing homes, choosing a home, or making an offer.

The practical answer is yes, for two reasons:

  • Agents are reluctant to show homes to buyers who are not pre-approved.
  • Sellers are reluctant to accept offers from buyers who are not pre-approved.

In fact, some agents simply won’t show homes to un-approved buyers. Additionally, some sellers ask that only pre-approved buyers be allowed to see their homes.

In today’s fast-paced real estate market, agents are busy. Their time is at a premium, so they don’t want to waste it showing homes to buyers who may or may not be able to make a purchase.

And, with multiple offers coming on most homes, sellers naturally want to know that the buyer they choose will be able to close on that purchase.

What is a mortgage loan pre-approval, and how do I get one?

A mortgage loan pre-approval is a letter written on a lender’s letterhead stating that the lender will provide you with financing up to a specified dollar amount, as long as the buyer’s financial picture does not change.

A mortgage loan pre-approval is granted after you make a formal pre-approval application and the lender verifies the same information that you would provide if you were making a loan application.

That information includes copies of your pay stubs, federal tax returns, W2’s, bank statements, investment accounts, and residential history. The lender will also verify your employment and access your credit report to learn your credit scores, your current financial obligations, and your financial history.

After analysis, the lender will decide whether or not to issue a pre-approval letter. If the answer is yes, the letter will include the maximum dollar amount you can borrow. At the same time, the lender will provide you with an estimate showing your loan costs, required down payment, and the interest rate he or she will offer you.

The benefits to you of having a mortgage loan pre-approval.

First, and most obvious, any offer you make will be taken seriously. Your pre-approval letter gives the seller confidence that you can purchase for the amount you’ve offered.

Second, it lets you know how much you can spend, and will thus narrow the choices when you begin looking at homes. Looking only at homes you can afford will save you both time and disappointment. It really does feel awful to fall in love with a house you simply cannot buy. Worse, anything else you see will never measure up.

So – if you want to buy a home, just do it.

Call Homewood Mortgage, the Mike Clover Group, and get started on your mortgage loan pre-approval. We’re known for our low interest rates, minimal closing costs, fast closings, and some of the friendliest loan officers in Texas.

Call us today at 800-223-7409

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Will Your Home Sale be Subject to Capital Gains Tax?

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You pay sales tax and income tax – and when you sell your home you may also pay capital gains tax.

What is it? It is the tax on the difference between what you paid for your house and the profit you make when you sell it. Other possessions and property are also subject to this tax.

There are two kinds of capital gains tax: long term and short term. Any sale you make within one year of acquisition is subject to short-term capital gains. These are taxed at the same rate as your other ordinary income.

The Tax Cuts and Jobs Act of 2018 changed the rules somewhat, so here’s what you need to know.

Unlike other investments, the sale of your primary residence benefits from some exemptions.

Under the IRS regulations, each person is entitled to a $250,000 tax-free gain upon the sale of a primary residence. For a jointly owned home, the exemption would be $500,000 – as long as neither party has taken this exemption within the previous two years.

Here are the requirements for taking advantage of the exemption:

  • The home must be your primary residence.
  • You must have owned it for at least two years.
  • You must have resided in the house for at least two of the past five years.
  • You may not have taken the exemption on another house within the past two years.

In other words, if you’ve owned a vacation house for several years and would benefit greatly from this exemption, you should move and make it your primary residence for at least two years.

If your employment forces you to move before the required two years, you may still qualify for a partial exemption. If you are in that situation, read IRS Publication 523 or consult with a tax advisor.

How much are long-term capital gains rates?

The rate you’ll pay will be based on your income and your marital status.

The long term capital gains tax rate is 0% if:

  • You’re a single filer and earn less than $40,400
  • You’re the head of a household and earn less than $54,10
  • You’re a couple filing jointly and earning less than $80,800.

Your rate will be 15% if:

  • You’re a single filer and earn between $40,401 and $445,850
  • You’re a head of a household earning between $54,101 and $473,750
  • You’re a couple filing jointly with earnings between $80,801 and $501,600 (yep, you get hit with a marriage penalty)

You’ll pay 20% on long term capital gains if:

  • You’re single and earning more than $445,851
  • You’re the head of the household earning more than $473,751
  • You’re a couple filing jointly and earn more than $501,601

In addition to federal capital gains tax, your state may impose its own version of a capital gains tax, and very high income taxpayers may be subject to an additional 3.8% net investment income tax.

The state of Texas does not impose its own capital gains tax – just one more good reason to live here!

Good record-keeping will help reduce your capital gains tax.

Since this tax is based on the difference between what you’ve invested in your house (the basis) and what you receive when it’s sold, improvements you’ve made will help reduce your tax.

So keep track of things like replacing your roof, finishing a basement, remodeling the kitchen, building a deck, replacing the flooring, installing new windows, etc. All of these activities will add to the adjusted cost basis of your home. Keeping records and receipts will pay off!

Do keep in mind that these expenses must be for improvements – not merely repairs.

Capital gains taxes don’t go both ways.

If you suffer a loss when you sell your personal residence, you won’t pay capital gains tax, but you also won’t get to take a deduction for the loss. If you sell other real estate at a loss, you can take a deduction (subject to limitations), but a loss on your home is considered a personal loss – not business.

The IRS does give heirs a break…

The IRS gives a free “step-up” in basis when an heir inherits the family house. If your parents purchased the family home decades ago, you might be looking at hundreds of thousands in profit over what they paid. Fortunately, you won’t be taxed on that.

Instead, when you sell that house, the cost basis of the house will “step up” to its value on the day your last parent passed away. This is one reason why your attorney will advise you to learn the market value.

If you want to lower future capital gains taxes while getting more enjoyment from your home today…

Come and talk to us about a cash-out refinance or a home equity loan. Then get busy making improvements that will add to the value of your home.

Homewood Mortgage, the Mike Clover Group, is known for our low interest rates, minimal closing costs, fast turn-around times, and some of the friendliest loan officers in Texas.

Call us today at 800-223-7409

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Have you saved enough for a down payment?

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One of the first steps toward becoming a homeowner is gathering the funds for a down payment.

If you’re thinking of buying a home, you may have cut back on non-essential services and purchases, held yard sales, or even taken a second job as a means of building your savings. Those are good things to do, but if you don’t know how much you need, you won’t know when you get there.

The truth is, thanks to government programs and assistance options, putting your down payment together may take less time than you think.

The first step: ask your real estate agent to recommend a reputable loan officer.

Real estate agents know which lenders offer programs with low (or no) down payments. They also know which lenders have served their clients well in the past.

Be prepared to share the details about your income, debt, financial accounts, and employment history. Your lender will need to verify and analyze this information in order to determine which programs are available to you. He or she will also need to check your credit report.

When it comes to down payments – how low can you go?

That depends entirely upon the loan program. A typical FHA loan requires 3.5% down. The median home value in Texas as of the 3rd quarter of 2021 was just over $204,000. That would translate to a down payment of $7,140.

However, Veterans Affairs loans and USDA loans require no down payment at all. To qualify for a VA loan, you must be/have been a service member or the spouse of a service member who died in the line of duty. For the USDA loan, you must buy in a community identified as rural. But no, you don’t have to be buying a farm. Homes in communities of less than 2,500 residents also qualify. Ask your lender if the community you’re considering is eligible.

Texas-specific programs also assist with down payment funds.

Texas has at least 5 programs that will assist. Some are 2nd mortgages which are forgiven if you stay in the home for a specific time period. Some are specific to first time buyers.

All are worth exploring if you need help with a down payment.

Do be aware that low and no down payment loans do cost a bit more.

Any time you make a down payment of less than 20% of a home’s selling price, you will be charged a fee for private mortgage insurance as a part of your monthly payment. This fee will be equal to from 0.5% to 1% of your loan amount each year.

This insurance stays with the loan for its duration. Therefore, if prices are rising and you are able to keep putting money aside, it could be wise to refinance in a few years. Once you have 20% equity or can deposit extra cash to bring your loan balance down to 80% of your home’s current value, you’ll be able to dispense with private mortgage insurance.

Of course, with no crystal ball to tell us about future home mortgage interest rates, we can’t say how it would affect your monthly payment.

If you’d like to know how much down payment you need to buy a home in Texas right now…

Contact Homewood Mortgage, the Mike Clover Group. We’re known for having low interest rates, minimal closing costs, fast turn-around times, and some of the friendliest loan officers in Texas.

We’ll be glad to talk with you, answer your questions, and get you pre-qualified for a loan if you’re ready.

Gaining knowledge is always the best first step, so get in touch!

Call us today at 800-223-7409

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Bad credit-building advice – ignore these 7 myths

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Before you apply for a home mortgage loan, it’s best to get your credit in the best shape possible. The higher your scores, the lower the interest rate you’ll be charged. And of course, if your scores are too low, you won’t get a home mortgage loan at all.

If you’re dreaming of a home, the first step should be to check your own credit scores (known as FICO scores in the housing industry).

Contrary to one popular myth, checking your own credit won’t lower your scores. Only inquiries from entities that grant credit will lower your scores.

So check to see where you stand. If your scores are low, begin now to improve them.

When you read your credit report, check to make sure all of the information is accurate. Check

Step one is to always pay every bill on time – every time. That said, here are 6 more myths that can do your credit more harm than good.

Myth #2: You’ll raise your scores by having and using plenty of credit.

While it is true that you must establish credit in your name in order to prove that you can manage your money, it’s also true that you must not overdo it.

Your use of credit makes up 30% of your credit score. A current home loan, a car loan, and credit cards are all good, as long as you keep paying on time and don’t over-use your credit lines.

Each credit card comes with a maximum line of credit. To keep your scores high, you should never utilize more than 30% of your maximum credit line. In other words, if your credit limit is $10,000, the balance you carry should be no more than $3,000.

The bottom line – having plenty of credit is good. Using all of it is not good. If you’re currently carrying balances on credit cards, pay them down as much as you can each month. The bonus to that is the faster you pay down those balances, the less interest you’ll pay.

The best plan for improving your credit  – use your credit cards and pay the balance in full each month.

Do use credit. People who have prided themselves on always paying cash can find themselves unable to obtain a home mortgage loan, simply because they have not established themselves as being able to handle credit responsibly.

Myth #3: You should cancel credit cards you aren’t using.

No – you should not. Keep them and use them occasionally – paying off the balance when it’s due. This shows that you have plenty of credit and have the self-control not to use all of it.

Keeping old accounts also give you a credit history. The longer you’ve held an account (and paid on time), the better for credit-scoring purposes. If all of your accounts are new, you have no history to fall back on. Unfortunately, this is one aspect of your credit score that you can’t fix quickly – it builds over time.

Your credit history makes up 15% of your FICO score, so closing old accounts can actually harm you.

Myth #4: A late payment now and then is no big deal.

Oh yes it is. Your bill paying history accounts for 35% of your FICO score. While nearly everyone has accidentally been late with a payment a few times in their lives, being late or missing payments with regularity is a big red flag to mortgage companies. It says you aren’t serious about managing your money and probably can’t be trusted to make mortgage payments on time. Late payments will not only lower your credit scores. They could prevent you from getting a mortgage at all.

Pay every bill on time. Every time.

Myth #5: Adding your spouse to your account will increase your credit scores.

Again, no. Each individual has his or her own credit scores. The only way adding your spouse could help your scores is if your spouse is the responsible one and makes sure those accounts are paid on time. Otherwise, it will have no effect.

Where adding a spouse with good credit does help, is in making a joint application for credit. The lender will look at both parties’ scores in determining whether you are jointly credit-worthy.

Myth #6: You should check your credit report often.

You can, and it won’t hurt anything, but there is no need. Check every few months to make sure no accounts have been opened in your name without your knowledge. That would be a sign of identity theft and needs to be addressed.

If you do find an error or signs of identity theft, each scoring company has instructions on line for making reports.

Myth #7: If your credit scores are low, you need to hire a credit repair agency.

Only if you like wasting money. There is nothing a credit repair agency can do that you cannot do for yourself. They may promise to remove negative information, but if the information is accurate, they cannot.

The bottom line: The only way to build and maintain good credit scores is to use credit, and use it wisely.

One more myth: You have to have perfect credit to obtain a home mortgage loan.

No, you don’t. While high scores result in the lowest interest rates, we do have mortgage loans available for those whose credit is not perfect. No matter what situation you’re in right now, we at Homewood Mortgage, the Mike Clover Group, will be glad to speak with you.

Call us today at 800-223-7409

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What is underwriting, and why can’t you skip it?

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Mortgage loan underwriting is a necessary and required step in getting a mortgage loan, but it doesn’t have to be an ordeal. And, while many believe it can take more than a week to complete, that isn’t necessary either.

Underwriting is the process by which lenders determine whether or not to grant a loan, based on a borrower’s history and current financial status.

Using the information provided by the borrower, the underwriter verifies everything. That includes the borrower’s assets, liabilities, credit scores, and income. They also look at bank statements and past tax returns. If you have a large or unusual deposit, they want to know where it came from.

The underwriter’s job is to determine whether lending to you is a good risk. Even then, your loan will be conditionally approved pending a last-minute check just prior to closing. The last-minute check is to make sure you haven’t quit your job or made a substantial credit purchase that would change your debt to income ratios.

Underwriting can be a trial or a breeze, depending upon the borrower’s choices.

Underwriting doesn’t have to be a nightmare, if you do two things right:

  • Choose a lender (like Homewood Mortgage) that has access to Fannie Mae and Freddie Mac and pre-underwrites their loans using automated underwriting.
  • Provide ALL required documents without being asked twice.

Your choice of a lender will make a huge difference.

You already know that different lenders offer different rates and terms, so you do need to make comparisons. You also know that some, like Homewood Mortgage, get loans approved and closed faster than others.

Part of the reason why is the service. When you are able to talk with your loan officer, ask questions, and get advice, things can go faster. You’ll get a complete list of standard documents to present for underwriting, and be forewarned about additional documents you might need.

After that, having a lender with access to desktop underwriting can get you conditional approval right away – often the same day.

Providing al of the documents will save you both time and stress.

Underwriters are well-known for asking for just one more piece of paper. When you present everything they could possibly want to see at the outset, you’ll avoid that. Yes, it can feel like an invasion of your privacy, but providing everything underwriting requires is the only way to get loan approval.

If you had an unusual deposit, provide verification of where it came from. Perhaps it was a birthday gift or maybe you sold a boat or RV. You may have cashed out an investment or gotten a bonus at work. Whatever it is, you’ll need to prove the source.

Why? Because the underwriter wants to be sure that you didn’t borrow that money and thus owe a debt that isn’t showing up on your credit report.

Underwriting is a necessary part of mortgage lending, so…

Get the advice you need from your lender, approach it with a positive attitude and provide all the necessary documentation.

You’ll soon find that your loan has been approved.

Are you ready to get started?

Then contact the Mike Clover Group at Homewood Mortgage. Whether you’ve already found the house you want or are ready to become pre-approved before you shop, we’re here to help.

Call us today at 800-223-7409

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Still searching for a house? How to protect your down payment money.

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You’ve saved up the typical 5-20% for a down payment, but haven’t yet been able to purchase a house.

What should you do with that money as you continue the search?

The answer depends a great deal on your future plans. Will you call off the search for now and wait for the market to cool down – or do you have hopes of finding your home in the near future?

If you’re taking a break, how long do you plan to wait?

Only a few weeks? Six months? Or perhaps you have kids in school and won’t get serious about moving again until the school year is ending.

At this point, time frame and safety are more important than yield.

Do you hope to need access to your down payment funds in a matter of days?

If you’re still actively searching, you want that money accessible immediately, so a savings account is the best choice. Many financial experts recommend placing that down payment money in a separate account from your regular savings – perhaps even in a different bank. That will reduce the temptation to dip into it for other purposes.

Waiting to buy carries some financial risk.

Although all indicators suggest that the market is cooling, home prices could still rise. Should that be the case, your down payment would need to be larger.

As of July 2021 the median home price in Texas was $191,902, and the year over year increase from 2020 was 12%.

Assuming you plan to purchase at that median, your down payment today would be:

5% = $9,595

10% – $19,190

20% – $38,380

Adding 12% to these numbers would bring them to $10,746, $21,492, and $44,105 respectively.

If you pay a higher price, you may need a higher down payment.

Thus, if you know you plan to wait at least 6 months, you may want to place part of your down payment in a money-market fund, bonds, or another low-volatility investment that will help it grow.

Note that some savings accounts offer higher yields, but have high minimum-deposit requirements.

Other higher-yield investments require a time commitment that would interfere with buying immediately when the perfect house appears. The gain you’d see from higher interest would be wiped out by early withdrawal penalties. Be sure you know and understand all of the terms before placing your money in a CD or other time deposit.

Your best course of action may be to continue saving and putting money away in a savings account for the down payment. After all, the larger your down payment the better terms you’ll qualify for when you get your home mortgage loan.

Always consider the tax consequences.

If you know you will wait longer than 12 months to resume your home search, you could put 100% of your down payment in a market fund or municipal bond. Even waiting 6 months could make it advisable to split the money between a regular savings and a market fund.

However, do consult with your tax advisor before moving forward.

Savings accounts don’t pay much, but…

Your money will be there when you’re ready to use it.

Other investments, such as cryptocurrency and special-purpose acquisition companies, can and often do produce high yields, but they come with the risk of losing it all.

Call us…

We at Homewood Mortgage, the Mike Clover Group, are not tax advisors, nor do we sell investment vehicles.

However, we will be glad to show you how the amount of your down payment might affect the rate and terms we can offer on your home mortgage. We’re known for our low rates, low closing costs, and fast closings, so take the time to get acquainted.

Call us today at 800-223-7409

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If you’re planning to buy a new home – postpone buying a new car

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If you’ve already been pre-approved for a home mortgage loan, your loan officer will have told you not to do anything that will change your financial picture.

That includes making any large purchases, obtaining new credit for any reason, co-signing a loan, or changing employment.

However, if you’re still in the thinking stages about making a home purchase, you should follow the same advice.

When deciding whether you qualify for a home loan – and what interest rate you might be offered – lenders look at your financial history. They want to see that you’re stable and have a proven track record of meeting your financial obligations on time.

Any new financial obligation is risky, and in many cases, a car loan is a sizeable obligation.

Your credit score is one of the first factors lenders consider when analyzing your loan prospects.

That score goes up and down based on your payment history – and one of the factors is the length of time you’ve been making payments to each creditor. The longer the better, so a 5-year-old car loan might raise your scores, while a new loan will lower them.

In fact, any new obligation will lower your scores, at least temporarily.

Depending upon the lender and the size of the monthly obligation, it will take from 2 to 6 months before your credit scores will return to their previous levels.

After 6 months, your on-time payments may serve to raise your credit scores.

To stay on the safe side – if you’re thinking of a home purchase within the next 6 months, it is in your best interests to postpone both the car purchase and any other new obligation.

Debt-to-income ratio is another determining factor.

You probably have a budget that tells you what you can and can’t afford to purchase each month. To calculate that budget you start with your projected income, deduct your fixed expenses, and see what is left over for food, clothing, entertainment, and other optional purchases.

Your lender does much the same thing, except the lender calculates the percentages.

This is called debt-to-income ratio. It is calculated by dividing your monthly obligations by your pre-tax monthly income. While different lenders use different guidelines, in general, the overall percentage should be no more than 36%. Of that, your monthly housing costs should be no greater than 28%.

For example, if you earn $3,000 per month, your monthly housing cost should be no more than $840. Your entire debt load, including credit cards, car loans, school loans, etc. should be no more than $1,080.

If you really need that new car…

Talk with your mortgage lender before taking any action. See where you stand at the moment and get his or her advice on how to proceed. Find out how that new obligation would affect your chance of obtaining a home mortgage loan – and how it would affect the interest rate you’d be offered.

Informed decisions are the best decisions, so get the facts before you proceed.

The Mike Closer Group is here to help.

We at Homewood Mortgage, the Mike Clover Group, will be happy to give you the facts and advice you need to make a good decision. We’ll also be happy to get you pre-approved for a mortgage loan, so you can shop with confidence.

Call us today at 800-223-7409

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Refinancing: Which lender should you choose?

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If you’ve been watching interest rates coming down and thinking about a refinance, you may be wondering whether to go back to your current lender or look around for a new one.

The beauty of refinancing with your current lender is that you probably won’t need to jump through so many hoops to get the job done. That being the case, you’ll probably get it done faster than you would if you started over. You might also not be required to pay for an appraisal, unless you’re asking for cash out.

In addition, your current lender might offer lower fees, just to keep your business. Then again, some companies only offer the best deals to new customers. It’s wise not to assume anything.

In spite of the convenience, it’s a good idea to shop for your refinance lender.

First, do check to see what your current lender will offer. Look at the interest rate, the points (if any), the closing costs, the repayment terms, and the documentation required. Get a written good faith estimate, so you can compare offerings point by point.

Closing costs on a home mortgage loan can range between 2% and 6% of the loan amount. On a $250,000 refinance, that’s a $10,000 spread, so it’s well worth your time to go shopping.

With your current lender’s information in hand, check with one or two other lenders.

Ask each for a good faith estimate, and ask what documentation will be required. Will they need a new appraisal if they refinance the current amount, or only if you want cash out?

Note that a lender won’t give you an absolute rate and terms unless you fill out an application and they have your documentation, so if saving time is your priority and your current lender makes an attractive offer, you may choose to stay with them.

Also note: Lenders’ widely advertised rates are generally the best they have to offer. Those rates and terms are reserved for those with excellent credit, low to debt to income ratios, and steady employment.

If you like your current lender but someone else offers a better rate and terms…

Contact your current lender to see if they’ll match the offer you found elsewhere. If you’ve been a good customer, they might be willing.

If you refinance your mortgage loan with a new lender, you don’t have to contact your current lender.

Your new lender will take care of paying off the previous lender as part of your loan closing. All you’ll need to do is give your new lender your loan number, so they can request the payoff.

Before you decide to refinance…

Compare the cost of the new loan to the dollars you’ll save each month. Then calculate how many months it will take to “repay” yourself the cost of the loan. If you plan to move within a year or two, it may not be worth the effort. If you plan to stay indefinitely, it probably is.

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Why Refinance Your Mortgage in 2021?

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If you have a home mortgage, you’ve probably been getting letters from a variety of mortgage companies, urging you to refinance right now.

Should you pay attention to them?

Yes. There are several reasons why you should, although rather than respond to the advertising from unknown companies, you should contact your current lender or another you know to be reputable.

The first reason to refinance your current mortgage loan is to save money.

Consider refinancing if your mortgage interest rate would be reduced.

Home mortgage interest rates are at historic lows, so if your credit is good and you can qualify for the low rate, you should look into it. Compare what you’re paying now to current rates to see how many dollars you would save each month. Then weigh the cost of the new loan.

If the monthly savings will outweigh the new loan charges within 2 or 3 years and you plan to stay in your home for the foreseeable future, then a refinance is worth considering.

Keep in mind that dropping from 4% to 3% on a 30-year fixed rate loan, you’ll save $56 per month on every $100,000 you owe.

If you have an adjustable-rate mortgage, refinancing into a low-interest fixed rate is always wise.

As far too many people learned during the mortgage crisis, adjustable-rate loans are high risk. We can never predict what will happen in the financial markets, so your payment could begin to drastically increase.

You may have needed it in order to qualify, but if you’ve maintained your credit rating and now have some equity, do consider refinancing now, while mortgage interest rates are at all-time lows.

If payments on credit card debt are eating up your cash-flow, it could be wise to refinance to wipe out that debt.

If you have sufficient equity to pay off your credit card debt by refinancing your home mortgage, it is something to consider. Credit card interest is usually much higher than the mortgage interest you’d pay on a refinance, and you’d be down to one payment.

This is only wise if you have the self-control to avoid running up new credit card debt.

If you want to save more for retirement, consider refinancing to reduce your monthly payment.

By reducing your mortgage payment, you may be able to make higher contributions to a 401(k). This is especially beneficial if your employer matches your contribution.

If you have little to no equity but want to reduce your payments by reducing your interest rate, there IS help for you.

The Freddie Mac Enhanced Relief Refinance program (https://sf.freddiemac.com/working-with-us/origination-underwriting/mortgage-products/enhanced-relief-refinance-mortgage) will allow you to refinance the unpaid principal balance on your home, plus closing costs up to $5,000, and cash back up to $250. There are no appraisals or minimum credit scores required.

The program is available to those who applied for their current mortgages after November 1, 2018. Eligibility hinges on having made timely payments for at least the past 6 months, and not having been more than a month late more than once in the previous 12 months.

If you think refinancing your home mortgage loan might be right for you, call us. We at Homewood Mortgage, the Mike Clover Group, will be happy to help you determine how much you could save, so you can make a wise decision.

Call us today at 800-223-7409

 

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Can your home help you lower your income tax obligation?

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The answer is “It depends.” Now that the standard deduction has been raised to $12,400 for individuals, $18,600 for heads of household, and $24,800 for married couples filing jointly, you may gain more by taking the standard deduction.

However, it pays to check before you file. Take some time to do the calculations.

Here’s a rundown on the tax breaks available to homeowners who itemize.

Mortgage Interest is first, foremost, and largest. Couples filing jointly can still deduct interest on up to $1 Million in mortgage debt if they purchased prior to December 15, 2017. For loans after that date, only the interest on the first $750,000 of mortgage debt is deductible.

Since interest makes up the bulk of the payment in the early years of a mortgage, you may gain from this deduction, at least for a few years after a purchase or refinance.

Your mortgage lender sends a statement at the end of each year showing how much you paid in interest, and if they’re escrowed, how much you paid for property taxes and homeowner’s insurance. If your debt is $750,000 or less and your mortgage interest is more than the standard deduction, do itemize. If the debt is higher, ask your financial advisor for help in doing the calculations.

Mortgage Points are still deductible, but note that they must be discount points, not origination points. Points are, after all, just pre-paid interest.

Private Mortgage Insurance is deductible for some borrowers. It is fully deductible if your adjusted gross income is less than $100,000. Between $100,000 and $109,000 it is 90% deductible.

Interest on Home Equity loans is deductible – again, with restrictions. The interest is only deductible if home improvements are the purpose of the loan. You cannot deduct interest on a home equity loan used to fund a vacation or your daughter’s wedding. Deductibility is further limited by the limits on deducting home mortgage interest. You may only deduct interest on $750,000 of debt on both loans combined.

Property taxes offer limited relief. There’s a $10,000 cap on tax deductions, whether property tax, state and local income tax, or deductible sales tax. You are allowed to bundle tax from all the real estate you own and deduct up to $10,000.

Pet-related home deductions…

  • When you are required to move for work, you’re entitled to a deduction for moving expenses. You’re also entitled to deduct the cost of moving your pets. Talk with your tax preparer about the requirements.
  • Purchase and care of a guard dog for your business premises is deductible even if your business is in your home.
  • Pest control – I was amazed to read this one, but purchase and care of a cat who “patrols” your premises for vermin is deductible. This is especially true if special circumstances apply. For instance: living next door to a landfill.

Tax credits are even nicer than deductions, and energy-efficient upgrades qualify.

If you added solar panels or a solar-powered water heater in 2020, do look into taking this 26% credit on the cost of purchase and installation. To qualify, solar panels must provide half of the energy used by the home (only your primary residence) and they can’t be used to heat your hot tub or pool.

Unless the rules change once again, the credit for 2021 purchases will drop to 22% before being eliminated.

You can take a home office deduction even if you don’t itemize…

While you are no longer allowed to claim this deduction if you’re a W-2 employee with access to an office elsewhere, self-employed individuals who work from home are entitled to the deduction on Schedule C – Business income and expense.

There are two ways to calculate the deduction. One is to calculate mortgage interest, taxes, insurance, and utilities, then use a percentage of the square footage to find the expense attributable to the home office. The other is to take the simplified deduction – $5 per square foot of office space, up to 300 square feet.

Do note that it must be a dedicated home office – used only for work. If you have a desk in the corner of your TV room, it isn’t deductible.

Is it time for you to take out a home equity loan to purchase solar equipment?

If you’ve been thinking about it, 2021 is the time to do it, before the credit expires. So call us …

Homewood Mortgage – the Mike Clover Group

Call us today at 800-223-7409

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