Markets in turmoil, Rates get better

Market Update

Monday, August 24, 2015

What's going on in the market?

Mortgage bond prices are continuing to jump higher amidst turmoil in global stock markets.  Market participants are concerned that economic weakness in China could spill into the global economy and spark a global recession.  This is causing investors to flock to the bond market for safety, and driving up the price of mortgage bonds.

Why does it matter?

When mortgage bond prices go up, mortgage pricing improves.  In fact, mortgage rates are currently at their lowest levels since May of this year.

What should you do about it?

Enjoy the rally in bond prices, but be prepared to lock your rate quickly if the market changes directions.

The 90-Day Window for Cash Buyers: How it Works & Why it Matters

The 90-Day Window for Cash Buyers:
How it Works & Why it Matters

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Congratulations on paying cash for your home!  I just wanted to make you aware that the IRS gives you a 90 day window to put a mortgage on your property and gain the tax benefits associated with the coveted “acquisition indebtedness” status.

What is “Acquisition Indebtedness” and Why Does it Matter to Me?

Any mortgage that is used to buy, build, or improve a primary or vacation home qualifies for “acquisition indebtedness” status. Any mortgage that is used for any other purpose is demoted to the “home equity indebtedness” status.

If you don’t put a mortgage on your primary or vacation property within 90 days of the purchase closing date, any mortgage you put on the property in the future that is not used specifically for home improvements will be demoted to “home equity indebtedness” status. This means that:

• You will NOT be able to deduct ANY of the interest at all if you are subject to the Alternative Minimum Tax (AMT)
• You will only be able to deduct the interest on up to $100,000 of the mortgage balance if you are not subject to the AMT

On the other hand, if you do put a mortgage on your primary or vacation property within 90 days and qualify for the special “acquisition indebtedness” status:

• You can use the funds for any purpose you want (including investment, starting a college fund for the kids or grandkids, retirement needs, etc.)
• You can deduct the interest on up to $1,000,000 of mortgage balance regardless of whether you are subject to AMT

Is There a Deadline to Qualify for the Tax Benefit?

Yes! You must put a mortgage on your primary or vacation property within 90 days of the purchase closing date in order to qualify for the special “acquisition indebtedness” status.

What if I Wait Until After 90 Days?

You will lose the special tax benefits associated with the “acquisition indebtedness” status. Any mortgage you put on your primary or vacation property in the future that is not used specifically for home improvements will be classified as “home equity indebtedness”.

Okay, So I Lose the Tax Benefit… But Why Would I Want a Mortgage On My Property in the First Place?

With interest rates being so low right now, you could use the funds for any number of reasons including:

• Investment - can you and your financial advisor find a safe investment that yields more than the 2% or 3% after-tax cost of your mortgage?
• College fund for your children or grandchildren - would you rather leave them a bunch of equity in a home or a legacy that makes an impact in their life?
• Elder care needs - do you have enough set aside to care for yourself or your loved ones as you age?
• Retirement needs – do you have enough set aside to provide income during retirement?
• Vacation home or other property – how are you taking advantage of the clearance sale going on in the housing market right now?

Remember, if you decide to wait and use a mortgage to do any of these things in the future, you won’t be able to deduct the mortgage interest. It may be worthwhile to put a mortgage on the property now, and then put the funds aside until you know what you want to do with them. After you make a decision, you could then pay off or pay down the mortgage with any leftover funds that you don’t use.

Does the “90 Day Rule” Also Apply to Investment Properties?

No. Investment properties have different rules, deadlines and guidelines that must be followed.

What’s the Next Step?

I would recommend that we have a brief 20-30 minute conversation to evaluate your options and whether a mortgage might make sense for you right now. You could then take my recommendations to your CPA and get his or her opinion before making a decision. If you don’t have a CPA, I’d be happy to make an introduction for you. Contact me using the info below so we can get started!

Five Reasons Real Estate Agents Should NOT Give Mortgage Advice

Five Reasons Real Estate Agents Should NOT Give Mortgage Advice

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1. SAFE Act and state licensing laws – it’s illegal to quote rates and fees and take an application (including the qualifying piece) unless you are a licensed loan originator. The licensing rules also prohibit anyone that is not licensed as a mortgage broker or lender from "advertising" mortgage loans. This might also apply to the "advice" given by real estate agents.
2. Federal Mortgage Advertising Practices (MAP) Rule (Regulation N) prohibits any misleading communication. This includes ALL communication via face to face, over the phone, email, online and otherwise. CFPB regulators can impose hefty fines on the agent if the agent gives mortgage advice without being a licensed loan originator… especially if it's wrong advice.
3. Depending on the advice given, the real estate agent may be engaging in "origination activities" as defined in the loan originator compensation rule, 12 CFR 1026.36(d), e.g. referring a consumer to a particular lender or loan product. The rule might require the licensed broker to perform background checks and train the agents, provided that the agents are deemed to be employees for purposes of the rule.
4. There may be state real estate laws that preclude or restrict unauthorized real estate agent activities. Also, the NAR Code of Ethics prohibits illegal and unlicensed activities.
5. Depending on the advice given, the real estate agent could be prosecuted for the unauthorized practice of law.

It's more important than ever to work with a licensed and qualified mortgage professional. Contact me for more details!

Three Ways to Avoid Getting Outbid on Your New Home

Bidding for a new home can get pretty fierce in today's market. Here are three potential solutions to avoid getting outbid on your new home:

Turn in your loan paperwork BEFORE you place an offer. In many cases, you are bidding against cash buyers who don't need to wait for financing approvals. Look at it this way: if you were the seller, would you prefer to do business with a buyer who needs to wait for financing approvals, or a cash buyer who can close the deal quickly? With that in mind, it's important to be proactive and provide your mortgage lender with things like your source of down payment funds, your asset documentation, your credit report and your income documentation. This way, you'll be in a better position to close the deal quickly and compete with those cash buyers.

Pay cash, but do it right. Keep in mind that you only have 90 days after closing to place a mortgage on a property that you bought with cash if you want to secure your tax deduction. (For more info, see my article entitled, 90 Day Rule for Cash Buyers.) In order to get that loan approval after closing, you'll need to document the source of funds that you used for your cash purchase. Talk to me for more details so that you can avoid problems down the road.

Write your offer correctly to begin with. Mortgage lenders are implementing some pretty significant changes this year to the legal requirements for mortgage paperwork as part of the Dodd-Frank Act. When real estate agents and loan officers aren't aware of some of these changes, it causes unecessary delays in the loan process. That's why it's important to work with someone like myself who keeps up to date on all the new requirements. I can work with your real estate agent to make sure you write your offer correctly in the beginning, so that you won't have to redo the paperwork and delay the closing.

Contact me so that we can further explore any/all of these ideas together!