Could Capital Gains Tax Erode your Texas Home Equity?

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When many of us think about capital gains we think of investors, but you as a homeowner could also be subject to capital gains tax.

It comes into play when you sell your home (or other assets) at a profit.

There are two types of capital gains tax – short term and long term.

Short term capital gains apply if you’ve owned the asset for one year or less.  This tax is based on your tax rate for that year. The profit will be added to your ordinary income and you’ll pay tax on the gain no matter how much you earned.

Long term capital gains rates are based on your income, but you’re your tax rate. They apply if you’ve owned the asset for more than one year. According to Bankrate.com, The long-term capital gains rates for real estate are as follows:

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Texas does not impose additional capital gains tax, although many other states do.

The primary residence tax exemption may erase your capital gains liability.

If you meet certain requirements, you and your spouse are each entitled to deduct $250,000 from the profit on your sale. Thus, if you paid $200,000 for your home many years ago and now sell it for $700,000 you will owe no tax.

The requirements are:

  • You must have owned the home for at least two years.
  • It must be your primary residence – not your summer cabin or winter retreat.
  • You must have lived in it for at least two of the past five years.
  • You must not have taken this exclusion on another house within the past two years.

There are exceptions if, for instance, your job forces you to move in less than 2 years. See IRS Publication 523 and consult your tax advisor.

Remember that capital gains tax is imposed only on your profit, so keep track of home improvements.

If you’ve replaced your roof, built a deck, replaced windows and doors, or finished the basement, all of those costs add to the cost – or “basis” – of your home.

Make sure to keep receipts and records of all such improvements – just in case your home appreciates beyond the primary residence exemption. Do keep in mind that ordinary repairs and maintenance don’t count.

You may owe very little if you sell an inherited house.

The good news about paying taxes on the sale of an inherited home is that the basis is “stepped up.” The original price of the home becomes irrelevant, and the value is set as of the day the owner passed away.

This is extremely beneficial to heirs whose parents paid $25,000 for a home back in the 60’s, and it is now worth half a million or more.

Is there a way for Texas real estate investors to avoid capital gains tax?

Yes, but it does require following specific steps. The solution is to swap like-kind properties through the use of a 1031 exchange. Such an exchange has strict rules regarding timelines and guidelines. Before attempting this, consult with an account and a real estate attorney. Then work with a real estate professional who is up-to-date on the rules regarding a 1031 exchange.

Here at Homewood Mortgage, the Mike Clover Group, we’re always happy to help our clients look at ways to benefit financially. If you have questions or want to know your options, just give us a call.

Call us today at 800-223-7409

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The Tax Benefits of Home Ownership

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Does home ownership still offer tax benefits? Yes, depending upon several factors:

The benefits aren’t as pronounced, however, since the Tax Cuts and Jobs Act went into effect on Jan. 1, 2018. This raised the standard deduction to $24,400 for married couples, so only about 5% of taxpayers now itemize.

It could still be in your best interests to itemize, especially if you have a recent mortgage, so the bulk of your monthly payment is going to interest.

Here’s what’s deductible under itemization:

Interest: Under the new rules, you’re entitled to deduct interest on loans up to $1 million if the mortgage went into effect before December 15, 2017. If your mortgage is dated December 16, 2017 or later, you can deduct interest on up to $750,000. This calculation will give your tax preparer a bit of extra work to do.

Still staying within the $1 million and $750,000 limits, you can also deduct the interest on Home Equity Lines of Credit – as long as the money was used to purchase or improve your house. If you used the money to finance a vacation, a wedding, or a new car, the interest is NOT deductible.

Property taxes: The deduction for property taxes is capped at $10,000 for those filing jointly, no matter how much you pay in taxes. Added to your mortgage interest and line of credit interest, this could bring you above the standard deduction, so be worthwhile to note.

Remember that if you have a mortgage, property taxes are built into the payment. Check your year end statement to see how much you’ve paid.

Private Mortgage Insurance: If you paid less than 20% down on your home, you’re no doubt paying for private mortgage insurance. This costs from 0.3% to 1.15%, depending upon the details of your loan. Again, check your end-of-year statement to see how much you paid in 2019.

Adding this to interest and property tax figures could make itemizing worthwhile.

Home Improvements to Age in Place: These can be deducted as part of your medical expense deduction, which must exceed 7.5% of your income and adds to your total itemized expenses on Schedule A.

These expenses must be deemed necessary by a doctor, and can include items such as entry ramps, grab bars, widening doors for wheelchair accessibility, installing railings, support bars, or other modifications to bathrooms, lowering or modifying kitchen cabinets and equipment, moving electrical outlets, and much more.

Credits and other deductions

Some energy efficiency upgrades are still a tax benefit.

Since these are credits, they’re worth more to your bottom line than a deduction, so be sure to claim them!

While most energy efficiency credits expired after 2016, you can still get tax credits for solar electric and solar water heating equipment. If you installed your equipment between January 1, 2017 and December 31, 2019, your credit will be 30% of the expenditure. This drops to 26% for 2020 installation and to 22% if you wait until 2021.

You can also take a credit for up to 10% of the cost of other energy efficient upgrades, such as doors and windows. There’s a lifetime cp of $500 on this, but if you’ve made the upgrades, you might as well take the available credits.

Home Office Deduction:

This is a deduction, but is reported on Schedule C, because it is a business expense. If your home office is your primary place of business, you’re entitled to deduct $5 per square foot, up to 300 square feet, for a total deduction of $1,500 per year.

Note that you may not take this deduction if you have another office and only work from home occasionally.

The bottom line: Owning a home is still a financially sound decision.

You may or may not save on taxes, due to the increased standard deduction. But you will build equity as each year goes by. And, when you obtain a fixed-rate mortgage, you will have the security of knowing that the only increase to your monthly payments will come from property taxes and insurance.

On the other hand, rent payments are likely to keep increasing.

If you’d like to explore the difference between continuing to rent and owning your own home, call us here at Homewood Mortgage, the Mike Clover Group.

We’ll be glad to get you pre-qualified for a loan, show you how much you can pay for a new home based on your current rent payments, and give you facts and figures with which to make a sound decision about your future.

Call us today at 800-223-7409

 

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Money guru says: “Choose a 15-year mortgage.”

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Money guru Dave Ramsey has a lot to say about buying houses, and one of the things he’s most adamant about is choosing a 15-year mortgage rather than a 30-year mortgage.

He also says that you should wait to buy until you can put 20% down and avoid private mortgage insurance, and to temper your choice so the payment on your mortgage is no more than 25% of your monthly take-home pay.

Dave says that if you can’t afford the payment on a 15 year mortgage, you either aren’t ready for home ownership, or you need to scale down your wants in order to buy a home you can afford.

Why does Dave recommend a 15-year mortgage?

The first reason is obvious. If you stay in your home until it’s paid off, you’ll own your home in 15 years rather than 30.

The second reason is that you’ll spend thousands less to achieve that ownership.

Let’s look at the difference in what you’ll spend to own that house.

Say you’ve chosen a house that costs $250,000 and you’re able to put 20% down. Your new mortgage will be for $200,000.

Let’s say you’ll pay 3.77% on a 30-year mortgage. The payment for principal and interest will be $928.50. Because banks charge a lower interest rate on 15-year mortgages, that interest rate would likely be 3.23%. Your monthly payment would be $1,403.39, or $474.89 more.

That seems like a lot, coming out of your monthly income, but if you can afford it, it’s worth it for the long term.

  • With the 30-year mortgage, you’ll pay a total of $334,260.
  • With the 15-year mortgage, you’ll pay a total of $252,610.20

That’s a difference of $81,649.80.

I won’t be there that long, so what does it matter?

It’s true that in today’s mobile society, most people don’t stay in the same home long enough to pay it off. Some reports say the average American moves every 5 years.

So doesn’t it make good sense to keep all the money I can in my pocket?

No, not really. Think about equity.

After 5 years on a 15-year loan, you’ll have paid in $84,203.40 and will still owe $143,752. You’ll have gained $56,248 in equity.

After 5 years on a 30-year loan, you’ll have paid in $55,710. And will still owe $180,214. You’ll have gained only $19,786 in equity.

With the 15-year loan, you’ll have paid in $28,493 more in payments and will have gained $36,462 more in equity.

See how the difference would affect you…

If you’d like to explore the difference between a 15-year and a 30-year mortgage on your new home purchase, call us here at Homewood Mortgage, the Mike Clover Group.

We’ll be glad to get you pre-qualified for a loan, help you decide how much you should pay for a new home, show you the current rates, and give you facts and figures with which to make a sound decision about your mortgage.

Call us today at 800-223-7409

 

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Should you pay down your mortgage as fast as possible?

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When you obtained your mortgage loan you may have been given a choice between a 30-year payoff and a 15-year payoff. Perhaps you could have afforded the payments on a 15-year note, but wanted the security of the lower payment – just in case.

That doesn’t mean you can’t pay off your loan in 15 years – or even sooner. When you send that monthly payment, you can increase it to any dollar amount you wish.

Is it a good idea?

The answer all depends upon your bank account and cash flow, plus investment opportunities available to you.

For instance: If paying down your mortgage means carrying a balance on credit cards, then no. It’s not. You’d be far better off paying off the credit cards in full each month.

Get rid of high interest debt first, then consider your next move.

It’s also a good idea to keep some cash on hand for emergencies and opportunities. If paying down the mortgage means an empty savings account, you’d be wise to wait a bit.

Paying your mortgage loan off early is like earning interest on an investment.

Does that sound strange? Look at it from the other direction: If your mortgage loan is at 4% and you pay an extra $500 per month to pay it down, it’s the same as making a $500 investment that yields 4%. That’s because every dollar of principal that’s paid off will never accrue more interest. (Apply the same thinking to credit cards and see why it’s wise to pay them off.)

If you’re in a position to earn a higher rate on investments, then paying down the mortgage is not wise.

If paying down your mortgage “earns” you 4% but you can invest the same dollars elsewhere to earn 6, 8, or 10%, then you should invest for the highest rate of return.

The most powerful way to benefit from early paydown…

Keep making the payments once your mortgage is paid off – but now put them into a retirement account.

Look at the difference in outcomes…

Say you have a new 30-year loan for $300,000 at 4%, with a principal and interest payment of $1,432.25.

If you make the required monthly payment, at the end of 360 months you’ll own your home.

Assume for a minute that you have an extra $567.75 per month, so you put it in a savings account. At the end of 30 years (360 months) you’ll have put away $204,390 plus interest.

$2,000 per month invested over 12 years would put $288,000 plus interest in your retirement account. Either way you’ll own your home and will have spent the same $2,000 per month. But by paying down the mortgage, you’ll have an extra $83,000+ (plus interest) in your retirement account.

Now let’s assume that you can more than double that payment, bringing it to $3,000 per month. The loan will pay off in 122 months – 18 years and 10 months early.

Are there other reasons NOT to pay a mortgage loan down early?

Possibly. One objection is that because your monthly interest charges will go down rapidly, you’ll lose tax deductions. This may not matter now, because since 2018 there are stricter limitations on home mortgage deductions. In addition, with the increased standard deduction, you may not even choose to itemize in the future.

What about the impact of inflation or deflation?

We have no crystal ball, so have no way to foresee whether we’ll soon see a period of raging inflation. If that happens, then it would be wise to discontinue paying down the mortgage, because you can pay it later with cheaper, inflated dollars. The opposite would be true if we enter a period of deflation.

Mortgage software makes it easy to see the impact that different payment amounts will make on your future finances.

If you’re interested, sit down with your lender and explore different options. Remember also that once the bank has committed to a fixed 30-year loan, that’s only the minimum that you’re locked into. You can add dollars or even double payments any time you have extra funds. That might be a good use for your income tax refund, a year-end bonus, or the windfall from a particularly good commission sale.

Here at Homewood Mortgage, the Mike Clover Group, we’re always happy to help our clients look at ways to benefit financially. If you have questions or want to know your options, just give us a call.

Call us today at 800-223-7409

 

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Co-signing a loan is a lot different from giving a character or credit reference

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Here’s what you need to know before you decide to add your name to that dotted line.

First, what does co-signing really mean?

At the bottom line, it means you are accepting full responsibility for making the loan payments.  You are adding the security of your income and credit history to the transaction, along with the “occupying borrower.”

When you agree to co-sign, your income, credit history, assets, and debts will be scrutinized by the lender, just as if you were the primary borrower. They’re attempting to verify that you have the ability to take over making payments if the primary borrower defaults.

Note that your high credit scores won’t guarantee loan acceptance if the person you are attempting to help has low scores. Credit scores are, after all, a reflection of a person’s track record of handling credit.

Co-signing can reduce your own ability to obtain a loan.

Remember that when you co-sign a note, that debt is added to your own debt with regard to your debt-to-income ratios. That means that while you might show the ability to make new mortgage payments of your own if only your own personal debt was considered, your lender has to assume that you are already making the payments on the note you co-signed.

Co-signing is risky.

If something happens to affect the primary borrower’s financial health, you must either take over making the payments or see your own credit destroyed. Even if the borrower misses just one payment, then catches up and resumes making on-time payments, your credit score will be affected. According to FICO, someone with a score of 780 or more would see a crop of 90 to 100 points in response to a missed payment. Late payments have a similar effect.

In a survey done in 2016, 38% of co-signers reported having to pay mortgage loan or credit card bills, while 28% reported suffering a reduction in credit scores because the primary borrower paid late or not at all. 26% said co-signing resulted in a damaged relationship with their friend or family member.

How can you protect yourself?

You love the person who asked you to co-sign. You want to help, but can you trust that person to meet their obligations? Past behavior is a good indicator of future performance, so first have a look at his or her credit report.

If there are late payments or defaults, is there a very good reason why? If they truly can’t handle money, you won’t be doing them any favors by helping them get further in debt.

If the problem is lack of income, can you see that their income is likely to rise immediately, or will the be stretching themselves too thin? Again, you might do them a favor by saying no.

If you decide to go ahead…

Make sure that you will be shown as a co-owner as well as a co-borrower. This will give you a measure of control, should it be necessary to sell the property.

Next, set up email or text alerts to tell you when payments are due and when they’ve been made. Since mortgage payments generally have a 15-day grace period for payment, this gives you the opportunity to step in and make the payments before a late charge is incurred and the late payment is added to your credit report.

Make sure the person for whom you’re co-signing knows how to reach you and knows that they MUST contact you immediately if it appears that they won’t be able to make a payment on time.

Do you have more questions? Call Homewood Mortgage, the Mike Clover Group. We’ll be glad to provide the answers.

Call us today at 800-223-7409

 

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Plan ahead to raise your credit score before shopping for a home

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When you apply for a mortgage loan to buy a home, the better your credit score, the better interest rate you’ll get. So even if your score is good, it pays to make it better.

If your credit is in poor shape, don’t be lured in to paying a credit repair company. You can do everything that needs to be done. And, contrary to what companies might promise, it cannot be done instantly.

How long will it take to raise my score?

How long it will take to raise your credit scores depends entirely upon what is pulling them down. But first, what scores are you aiming for. Here is how most lenders rate scores:

  • Perfect:            850 (which hardly anyone ever attains)
  • Excellent:         760-849
  • Good:               700-759
  • Fair:                 650 to 699
  • Low:                649 or less

Different lenders have different guidelines, but generally, a score of 660 or more is required to obtain a mortgage loan.

The fastest way to raise your score: Correct errors on your credit report

Experts say that as many as 70% of all credit reports contain some kind of errors. Some are harmless, while others could be dragging you down. Remember that the reports are generated from data entered by humans – and humans do make data entry errors.

Thus, your credit report could be showing an account that’s not even yours. It takes a month or two to correct that type of identity error.

Next, there could be errors with accounts you do own. For instance, a loan that was paid off could still be showing as open. It take up to 90 days to correct those errors – and even longer if your creditor is uncooperative.

Your first step: Get a copy of your credit report from each of the 3 credit reporting bureaus: TransUnion, Equifax, and Experian.

Why all three? Because they don’t always contain the same information. An error on one report may not show up on another. You need to obtain and carefully read all three.

When you find an error, you’ll need to provide documentation to prove it is an error. For instance, if someone is showing a late payment, you’ll need to bring in a bank statement or a receipt showing that it was paid on time. Today, with electronic payments, you might have an email showing the amount and date of your payments. (A good reason not to delete those emails!)

Once you’ve reported an error, credit bureaus have 30 days in which to investigate. They may ask for additional documentation or ask you to communicate with the creditor. Pay attention to all communications from the credit bureau and the lender!

Your credit scores may be low because you don’t have credit history.

I’ve known people who were both shocked and angry to learn that they had poor credit after a lifetime of paying cash. They’d been responsible citizens, never going in debt, and this was the thanks they got!

It’s true. Unless you’ve used credit and shown your ability to make regular, on-time payments, your scores will remain low.

In this case, you’ll need to open a credit account, use it, and make payments on time. Don’t over-spend and don’t go beyond 30% of your credit limit on any one card. Look for a credit card with no annual fee and the lowest interest rate possible. If you look online, you’ll find a dizzying number of choices, so don’t take the first one you see.

If you aren’t approved for a card because your credit scores are low, it is possible to get a secured credit card. Use it for gasoline or groceries and pay it off each month to avoid high interest charges.

Delinquent accounts must be addressed.

If you have delinquent accounts or accounts in collection, bringing them current will boost your scores quickly.

Your history of making late payments will remain on your credit report for 7 years, but no longer being in arrears or collections will help.

Do note: If you have bad accounts that have been on your report for six years or more, you might want to leave them alone and simply wait them out. These will automatically fall off your report after 7 years. If you attempt to bring them up to date by making one or more payments, then fall behind again, the 7 years will start all over again.

So think carefully before touching those accounts. You might be best off to concentrate on keeping more recent accounts current.

Use less of your available credit!

Just as you shouldn’t spend every dollar you own, you shouldn’t use all the credit you have. 30% of your credit score is based on how much you owe relative to how much credit you have, and that magic number is also 30%.

If you have $10,000 in credit available, strive to use no more than $3,000.

The best way to reduce this ratio is to stop charging and apply more to paying down your balances. However, that can be tough if your balances have crept up over time.

The second best way to change your ratio is to ask your current credit card issuer for a credit line increase – and don’t use it once you get it! Before you ask, be sure to ask if they do a “soft credit pull” before increasing your limit. A “hard credit pull” will automatically lower your credit scores.

Credit card companies report to the credit bureaus once per month. If you’re using your card for daily expenses, then paying down by that amount after the bill comes in, consider making some smaller payments earlier in this month. If you use your card to do a big grocery shop or to fill up your gas-guzzling SUV, then go home and make a payment for that amount on your credit card. This will keep the reported balance at the end of the month down.

Note: A poor way to change your usage percentage immediately is to apply for a new card. Every application lowers your credit scores, and the effect will last for months. If you’re thinking ahead a year, it might be a good tactic.

Thinking ahead to the future…

A good credit score will help you with everything from buying a home, to buying a car, to obtaining a new cell phone. Your credit scores can even affect your ability to qualify for certain employment.

Take steps now to protect your credit. If it’s good – see if you can make it better. If it’s poor, get started on making it good.

Correcting errors, bringing your debts current, and keeping your credit use low will help right now. For the future:

  • Make sure you pay all accounts on time
  • Limit your use of credit
  • If you tend to forget to pay on time, set up automatic payments.
  • Check your credit report regularly, so you can catch and  correct errors.

If you’re ready to see what interest rate you qualify for now, or if you simply have questions, we at Homewood Mortgage, the Mike Clover Group, will be glad to help.

Call us today at 800-223-7409

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Which Type of Home Loan is Right for You?

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Unless you’re independently wealthy, shopping for a home means taking out a mortgage loan. Wise consumers shop for the loan before they shop for the house.

Why? Because there are several types of home loans, and because different lenders offer different rates and terms.

The first step is to decide which type of loan is best for you.

  • Conventional fixed-rate loans
  • Conventional adjustable-rate loans
  • FHA loans
  • VA loans
  • USDA loans
  • Bridge loans

The most common type of Conventional loan is the fixed-rate loan. This means just what it sounds like. The interest rate remains the same throughout the life of the loan. They’re offered as 15-year loans, 20 year loans, and 30 year loans.

While many believe that consumers must pay 20% down to obtain a conventional loan, that isn’t so. Rates as low as 3% down (for first time homebuyers) are available. The difference is that the borrower will be required to purchase mortgage insurance to protect the lender.

This is the right loan for consumers who want the predictability of a fixed loan amount from year to year, and who plan to remain in their homes for an extended period of time.

The Adjustable-rate conventional loan (ARM) offers opportunity for consumers who plan to re-sell the home within a few years. Lenders offer a starting interest rate which is considerably lower than their fixed-rate loans, with the agreement that the interest rate will adjust after a set number of years. The amount by which the rate can adjust each time is also pre-set.

Different lenders offer a variety of programs with different pre-set adjustment periods, so if you’re considering this option, talk to your lender about the many options available.

This is a good loan product for people who plan to relocate or refinance into a fixed rate loan before the first adjustment period ends. It does carry some risk, as many learned during the recent housing crisis.

Jumbo Loans

When you hear the term “Jumbo loan” you might think it refers only to loans in the millions, but that’s not so. A jumbo loan is a home mortgage loan for any amount that exceeds the loan limit on conforming loans.

After the housing crisis and the enactment of new regulations under the Dodd-Frank legislation, many mortgage brokers pulled out of the jumbo loan business, leaving them to the large retail banks. Homewood Mortgage, however, continues to offer Jumbo Loans, and – as with all of our offerings – at very competitive rates.

Government-Sponsored Loans

FHA (Federal Housing Administration) loans are the first choice for the majority of borrowers with a low down payment. They’re backed by the federal government and require mortgage insurance over the life of the loan. Loans may be for 15 or 30 years.

These loans are limited to a specified amount – in 2019 the limit is $314,827 for a single family home in most communities and $726,525 in high-cost areas such as Los Angeles and New York City.

VA loans are for those who have served or are serving in the United States military for 180 days during peacetime, 90 days consecutively during wartime, or six years in the military reserves.

To be eligible for a VA loan, the home must meet minimum property requirements – so “fixer” properties are not considered. In addition, the home must be the borrower’s primary residence.

These are zero down payment loans with no mortgage insurance. Most borrowers will be required to pay a VA Funding Fee, but even that is waived for Veterans who have been injured in the line of duty. In addition, VA loans offer discounted mortgage interest rates.

USDA loans are also known as Rural Development loans.

These are loans with no down payment and lower interest rates, available to lower income borrowers in specified areas. From the name you’d expect these to all be rural areas, but that isn’t the case. In fact, homes in all but the areas in and around major cities are eligible. Check the map at: https://eligibility.sc.egov.usda.gov/eligibility/welcomeAction.do to see if homes in your area qualify.

Homes must meet broad safety and health guidelines, and must be the borrower’s primary residence.

Are you thinking of buying or refinancing?

We at Homewood Mortgage, the Mike Clover Group, will be glad to give you more detailed information on loan programs available to you – and to get you pre-approved so you can go forward with confidence.

Call us today at 800-223-7409

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Another reason Californians flock to Texas – our homestead tax exemption

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Every state but New Jersey offers homeowners the opportunity to file a homestead tax exemption, which lowers the taxable value of our homes for property tax purposes.

As the name “homestead” indicates, this tax break is available on your primary residence only. Investment property and second homes are not eligible.

In most cases, the homestead exemption is a fixed discount on taxes.

Here in Texas , where the median home value is $197,500, we get a $25,000 exemption for school taxes, and a $3,000 exemption for certain county taxes. Seniors and disabled homeowners also qualify for an additional $10,000 exemption.

If you’re a senior citizen with a home valued at $197,500, you’ll be taxed on $159,500.

In California, where the median home value is $611,190, the exemption is only $7,000. If your home is valued at $611,190 you’ll be taxed on $604,190.

The second benefit of a homestead exemption is shelter from unsecured creditors.

If bankruptcy, illness, or the death of a spouse is causing creditors to call, your homestead exemption can prevent creditors from forcing the sale of your home. If the equity in your home is less than your homestead exemption, there’s nothing they can touch. Beyond that, State laws apply. Rather than force the sale of a home, unsecured creditors can obtain a judgement and file a lien against your home – for payment when and if it is sold.

Here in Texas, judgement liens can remain attached to a property for ten years.

If you’ve just purchased a home, be sure to file your request for a Homestead Exemption with the County immediately. Different states and counties have different deadlines for filings, so don’t take a chance. In Texas, the exemption might transfer with the sale of the house, but it’s still best to check with the County to make sure you’re covered.

While we might enjoy some of the services our taxes pay for, I have yet to meet anyone who would prefer to pay more taxes than absolutely necessary.

If you’re getting ready to buy a home in Texas, call Homewood Mortgage, the Mike Clover Group. We’re proud to offer fast service, plus the lowest fees and rates you’ll find in Texas.

Call us today at 800-223-7409

 

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Is it wise to pay extra on your home mortgage?

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Whether or not you should pay down your mortgage depends upon your plans and the other circumstances in your life. Let’s take a look at the pros and cons.

First, the pros…

Your mortgage will be paid off sooner.

For many who plan to live in their homes indefinitely, paying it off sooner is a huge incentive to add dollars to each month’s payment. When you stop to consider that in the early years of a mortgage loan the bulk of the money is going toward interest, an increase of just a few hundred can knock a full month off the end of your loan.

Just to round things off, consider that you have a $1,200 per month payment and only $300 is going toward the principal. Paying $1,500 is akin to making two payments at once. If you do that for a year, you’ll reduce your loan term by a year. Of course, as you pay down the loan, the ratio of principal to interest will change.

You’ll pay less interest over time.

Let’s assume for a moment that you have a $250,000 fixed-rate mortgage with a 4% interest rate and 30 year amortization. Your monthly principal and interest payment will be $1,193.54. If you pay that amount for 30 years, you will have paid $179,673 in interest.

Should you decide to pay $1,400 per month instead, you’ll pay off the house in about 274 months, and pay a total of $133,600 in interest.

The less you owe, the more equity you’ll have.

This could be a benefit if you some day wish to take out a home equity loan for improvements, or if you wish to sell and use your equity as a down payment on a new home.

The less you owe, the better your credit score.

This could be important at some time in the future, since high scores equal lower interest rates on everything from a car loan, to credit cards, to a mortgage on a vacation home.

Now for the Cons…

Paying less interest could mean paying more income tax.

Depending upon your financial situation, your mortgage interest could be helping to reduce your tax bill. Since tax regulations have changed, this is something to discuss with your tax accountant.

Paying more on your mortgage might mean paying more interest on higher interest debts.

Look at your car loan, a student loan, or a credit card balance before deciding to pay down the mortgage. When you have extra funds to use, it’s always wise to pay off the highest interest debt first.

You might be wise to put more into savings.

First, everyone should have an emergency fund. Having 6 months or more worth of cash in a readily available account will give you peace of mind. Then, consider putting more into retirement funds, especially if your employer will match your contributions.

Your mortgage loan could have a pre-payment penalty: Beware!

While this isn’t as common as it once was, some lenders do add a pre-payment penalty clause to their mortgage agreements. This penalty could equal several months’ interest or be a percentage of the balance due. Be sure to read your mortgage loan documents carefully before deciding to pay down your mortgage.

Interest rates are still way down – so if you’re ready for a refinance, get in touch.

And just so you know, here at Homewood Mortgage, the Mike Clover Group, we never add pre-payment penalties to our mortgage loan documents.

Call us today at 800-223-7409

 

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Why don’t the APR and my Interest Rate match?

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More than one home buyer has been startled to read the APR on their loan closing statement and see that it isn’t the same as their quoted interest rate. They react with “Wait a minute! This isn’t right!”

What they don’t know is that the APR is how much the borrower will pay in interest and other fees. The APR is the total cost of borrowing money over a one year period.

Those other fees include items such as the closing costs, points, origination fees, and private mortgage insurance. These are all lender fees.

In order to make a true comparison, you should obtain and use both your interest rate and your APR when comparing the cost of purchase or refinance loans from different lenders. Two different lenders could quote you the same interest rate, yet have vastly different APRs. This is because one is charging more for the privilege of borrowing money.

Do be aware that some lenders move some of their costs out of the APR, so take the time to read what is included in each estimate before relying solely on the APR numbers.

Some of your closing costs – those that are 3rd party fees – aren’t included in the APR. These would include the appraisal, title search and insurance, credit report, and transfer taxes.

Both the APR and the Interest rate are important

The APR covers up front fees that you’ll pay at closing. Your interest rate will keep on for the life of the loan. Look at both numbers and compare. Then do the math. It could be wise to pay a higher APR (more out of pocket at closing) in order to obtain a lower ongoing interest rate.

Different lenders offer different APRs and different interest rates, so it does pay to shop around.

Why was I not offered the advertised interest rate?

The advertised interest rate is the best the company has to offer. Unfortunately, most borrowers don’t qualify for the best, due to variations in their situation and the loan they seek.

Six factors are taken into consideration in determining the interest rate a lender will offer. To make it even more confusing, different lenders rate these six factors in different ways.

The factors are:

  • Your FICO credit score
  • The loan amount and down payment
  • The location of the home in question
  • The loan type
  • The length of the loan (term)
  • The type of interest rate

First, your credit score. As you probably know, this is a reflection of your bill-paying habits over the past many years. Lenders see your numerical score as a prediction of how reliable you’ll be in making a monthly mortgage payment. The higher your score, the better interest rate you can obtain. A perfect sore is 850.

Note that your FICO credit score may be different than the score obtained by a car dealer or insurance company.

Your loan amount and down payment matter because they’re a measure of the risk your bank takes when lending against the house. The more of your own money you can invest, the less risk there is to the bank. Banks feel much more secure when you’ve put down 20% than when you’ve only put down 5%.

This is why loans with down payments of less than 20% come with private mortgage insurance (PMI). This will cost you from 0.3% to 1.15% of your home loan, and is added to your payment monthly. While this is insurance paid for by the borrower, it only covers the lender in case of default.

The home’s location. Interest rates are affected by the strength of your local housing market.

The loan type: Conventional mortgages, which are geared toward borrows with well-established credit, steady income, and solid assets, carry the lowest interest rates. FHA, VA, or Rural Development Loans, which are government backed loans available for little or no down payment, carry slightly higher rates.

The loan term: Shorter term loans carry lower interest rates.  Thus, borrowers who are able to meet the larger monthly payments on a 15-year loan will save even more than they save by paying the loan off sooner.

The type of interest rate: Borrowers can opt for a fixed-rate mortgage or an adjustable-rate mortgage, or ARM.

A fixed-rate mortgage is just what it says. The rate is fixed at the time of the loan and does not change. The only adjustments to the borrower’s monthly mortgage payment will come from increases in taxes or homeowner’s insurance.

Adjustable rate mortgages generally start out at a lower interest rate than a fixed-rate mortgage, then the rate adjusts (increases) over time. Rates are adjusted at pre-set intervals of 3, 5, 7, or 10 years.

Adjustable rate mortgages can be beneficial to borrowers who plan to move before the rate adjusts or who feel assured of an increase in income before the end of the adjustment period.

Here at Homewood Mortgage, the Mike Clover Group, we’re pleased to offer the lowest interest rates and APRs available in Texas. We’re also pleased to offer pre-approval services and to help our borrowers determine the most beneficial loan for their unique situation.

Call us today at 800-223-7409

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