What You Need to Know About Forgiven Mortgage Debt (2015 - 2016 Rules)

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The tax break for forgiven mortgage debt was extended until December 31, 2016, and retroactively impacts forgiven mortgage debt in 2015. This means that you won't be required to pay income taxes on mortgage debt that was forgiven you in 2015 or 2016 as long as:

1. The total amount of mortgage debt forgiven you is under $1mm; and,
2. The forgiven mortgage debt was specifically used to buy, build or improve your primary residence.

For example, if the lender forgives you $50,000 in debt, and your income tax bracket is 25%, you would normally owe the IRS $12,500.  However, if this forgiveness of debt took place in 2015 or 2016 under the conditions outlined above, you wouldn't owe the IRS anything!

The "Insolvency" Exception

Here's an interesting twist: you would owe taxes on the forgiven mortgage debt if the mortgage funds were NOT used buy build or improve your primary home.  The only way around that is what's known as the "insolvency exception".  This rule states that there's no tax on the forgiveness of debt if you are "insolvent" at the time of debt cancellation. Insolvent simply means that your total debts are greater than your total assets. In our example, assume your total assets are $20,000 and your total liabilities are $70,000. This means that your net worth would be negative $50,000. This would make you "insolvent" according to the IRS, and you wouldn't have to pay any taxes at all on the $50,000 in forgiven mortgage debt! Keep in mind that when you calculate your assets, you need to include everything you own, including exempt assets beyond the reach of creditors under the law, such as interest in a pension plan and the value of your retirement account.

PLEASE NOTE: THIS LETTER AND OVERVIEW IS PROVIDED FOR INFORMATIONAL PURPOSES ONLY AND DOES NOT CONSTITUTE LEGAL, TAX, OR FINANCIAL ADVICE. PLEASE CONSULT WITH A QUALIFIED TAX ADVISOR FOR SPECIFIC ADVICE PERTAINING TO YOUR SITUATION. FOR MORE INFORMATION ON ANY OF THESE ITEMS, PLEASE REFERENCE IRS PUBLICATION 4681.

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Jay Sibley 321-689-0089
NMLS Number: 383991
Sibley Mortgage Group, LLC
Corporate NMLS Number: 1041547
jay@sibleymortgage.com

(321) 689-0089
919 Timber Isle Dr
Orlando, Florida 32828

   

How Much Does College Cost These Days?

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According to the College Board, the average total costs (including room and board) for a four-year public in-state school is a whopping $21,447 per year.  That amounts to $85,788 over four years.  Average costs skyrocket to a whopping $42,224 per year for a four-year private education!

The perfect storm here is that college costs have increased dramatically, while state funding for college has declined by similar leaps and bounds over the past several years.

That's one reason why it's more important than ever before to consider these costs as you create a mortgage and cash-flow plan for your family.  Let me know if I can run some mortgage numbers for you or help in any way.

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Jay Sibley 321-689-0089
NMLS Number: 383991
Sibley Mortgage Group, LLC
Corporate NMLS Number: 1041547
jay@sibleymortgage.com

(321) 689-0089
919 Timber Isle Dr
Orlando, Florida 32828

Three Things You Should Know About Loan Estimates

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Beware! Not all Loan Estimates are created equal. Here are three things you should know about Loan Estimates, where all the closing costs are itemized.

#1 - The Rate quoted to you on Page 1 is not locked... unless the "Yes" box is checked!

Mortgage rates are determined by mortgage bond prices in the bond market.  When bond prices go up, mortgage pricing improves and mortgage rates go down.  When bond prices go down, mortgage pricing gets worse and mortgage rates go up.  Bond prices are often volatile, just like stock prices.  The chart below illustrates how mortgage pricing got worse two times in a single trading day recently!

Think about getting a stock quote from Stock Broker A at 9am in the morning.  Then, you get another quote on the same stock from Stock Broker B at 3pm in the afernoon.  If the stock price is different between the two brokers, what does it really mean?  It could simply mean that stock prices have changed throughout the day.  Mortgage rates work in much the same way.  While there are some price differences between lenders, much of the price differences you'll notice are due to market fluctuations.

On the same token, imagine going to stock broker who uses yesterday's newspaper to quote you the price of a stock today, right now.  Or, imagine working with a stock broker who is quoting you a price on Stock A by looking at the price of Stock B.  That's why it's crucial to work with a mortgage lender who understands what drives mortgage rates, and one who has access to real-time mortgage bond pricing.  One helpful question to ask your mortgage lender or broker in order to test his/her knowledge of the market is: "What drives mortgage rates higher or lower?"  If the lender/broker answers the Fed, or the 10-yr Treasury, you know that it's probably time to move on.

On the other hand, you probably have a winner if the lender/broker shows you a picture of the market and helps you understand the factors that may cause mortgage bond prices to get better or worse in the coming days.  Also, beware of rate lock periods that are too short.  For example, if your rate lock is only good for 30 days, but you end up closing on Day 35, you will likely have to pay for a rate lock extension.  Please reference the article I wrote called,Why Do I Have to Pay for a Rate Lock Extension?

 

#2 - Beware of Innacuracies in the "Other Costs" Section on Page 2.

This section outlines things that should really be the same from one lender to the next. Neither you nor the mortgage company have any control over how much the government is charging for transfer taxes and recording fees.  These charges should be the same from one Loan Estimate to the next.  If you find a Loan Estimate that has lower fees than the rest, it's likely that the lender or broker who gave you that Loan Estimate is trying a "bait and switch" tactic by promising artificially low government charges when they know the actual government charges will likely be higher than what they are quoting you.  One variable in this section that may change from one lender to the next is the mortgage insurance premium, because that is based on the loan product that you choose.

#3 - Don't let the government do the thinking for you on Page 3.

Bless their hearts.  The government wants to make sure that you make an informed financial decision, so they inserted a section on page 3 of the Loan Estimate with certain metrics they want you to look at.  As you look at this section, it may appear that a 15-year mortgage is WAY better for you than a 30 year mortgage because the total interest paid over 5 years with a 15 year mortgage is WAY less than a 30 year mortgage.  Also, your total interest percentage (TIP) would be lower with a 15 year mortgage.  However, this doesn't take into account your real-life cash flow scenario.  For example, what if you were to take the monthly payment difference with a 30 year mortgage and invest it in your college fund for your children, or your retirement account, or your savings account for elder care expenses your family may incur?  Is it better to save money on interest or is it better to have the lowest cost of borrowing over time based on your specific cash flow scenario?  The government is not your financial advisor (and neither am I).  You should really think for yourself and speak to a financial advisor about the financial planning implications of your mortgage decision.

As for your mortgage options, I'd be happy to help in any way I can.  Contact me for more information!

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Jay Sibley
NMLS Number: 383991
Sibley Mortgage Group, LLC
Corporate NMLS Number: 1041547
jay@sibleymortgage.com

(321) 689-0089
919 Timber Isle Dr
Orlando, Florida 32828

  

Bond Market Update

 Mortgage pricing is better than it was yesterday

Source: Thomson Reuters

Market Update

Friday, December 18, 2015

What's going on and why does it matter?Mortgage bond prices have rebounded on indications that the Federal Reserve is likely to continue its bond-buying program throughout 2016.  The Fed has been the biggest buyer of mortgage bonds in the market, so mortgage pricing has improved slightly on the news.  Bond prices are near their technical levels of resistance, so the uptick in bond prices may be short-lived.  All-in-all, it should be a relatively quiet day in the markets today.

What should you do about it?
Enjoy the uptick in bond prices, but be prepared to lock your rate if the market changes directions.

Economic Calendar

Economic reports that may impact mortgage rates this week:

Date	Report	Period	Prior	Estimate	Actual
Tue 15 Dec	Core CPI	Nov	+0.20%	+0.20%	+0.20%
Wed 16 Dec	Building Permits	Nov	1,150,000	1,150,000	1,289,000
Wed 16 Dec	Housing Starts	Nov	1,062,000	1,135,000	1,173,000
Wed 16 Dec	Fed Funds Rate	-	0.125%	0.375%	0.375%
Thu 17 Dec	Initial Jobless Claims	Week of Dec 13	282,000	275,000	271,000

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Jay Sibley
NMLS Number: 383991
Sibley Mortgage Group, LLC
Corporate NMLS Number: 1041547
jay@sibleymortgage.com

(321) 689-0089
919 Timber Isle Dr
Orlando, Florida 32828

  

Three Reasons to Buy a Home this Winter

Three Reasons to Buy a Home this Winter

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The winter can be a fantastic time to buy a home because:

1. Sellers tend to lower their list price in the winter.  Most sellers who weren't able to sell their home in the summer become more willing to accept an offer below list price during the winter.  After all, the alternative for the seller is to wait until next spring or summer to sell the house.  In the meantime, he/she would have to pay the mortgage, property taxes and utilities.  
2. You are competing with fewer buyers.  One main reason why most buyers wait until the spring or summer to buy a house is because they don't want to move their children to a new school district in the middle of the school year.  However, this shouldn't be a limiting factor for you if you don't have children, or if your children are too young (or old) to go to school.
3. You are positioning yourself to benefit from price increases next spring and summer.  The spring and summer homebuying season is when most people buy houses.  Therefore, if you get a good deal on the purchase of your home this winter, you'll likely benefit when prices go up in the spring/summer.  This sure beats getting stuck on the losing end of a bidding war or price increase!

Contact me so that we can further explore how you may benefit by buying a home this winter.

Three Questions to Ask Yourself for a Happier Retirement

#1: What does retirement mean to me?

Many people think of retirement as a time in your life where you can work if you want to, but not because you have to. In other words, how would you feel if you could work for fun and/or pursue your passions without worrying about money? This requires financial independence, or having enough money to:

• Cover your needs and basic wants
• After taxes
• After inflation
• For some period of time (usually you and your beloved's lifetime)

The amount of money necessary for financial independence is called "Critical Capital". This is a pile of money that can sustain all your retirement expenses with inflation and after taxes for the requisite time period. This may be in an assortment of piles of money such as funds in your 401(k), Roth IRAs, and taxable money. Retirement could mean reaching a point where you have enough Critical Capital to spend your money making a life versus being forced to spend your life making money. Now that's exciting!

#2: What is the role of mortgage planning?

Your mortgage is most likely your single largest debt, and your house is most likely your single largest asset. Your mortgage and home equity situation impact your:

• Cash flow
• Tax deductions (or lack thereof)
• Net worth and wealth position
• Liquidity (access to your money)
• Estate and legacy planning

It's important to ask yourself whether your mortgage or real estate equity strategy is helping or hurting your chances of acquiring the right amount of Critical Capital. Does it make more sense to use a smaller mortgage and invest more cash flow into your Critical Capital fund? Does it make more sense to use a bigger mortgage and invest more upfront cash into your Critical Capital fund? What about using or planning to use reverse mortgage now or at some point in the future? Mortgage planning asks and answers all these questions to help you avoid missing your mark and not having enough Critical Capital. Your mortgage, housing, and cash flow strategy play a large role in helping you achieve financial independence.

#3: How Will I Get Enough Critical Capital?

Remember, the amount of money necessary for financial independence is called "Critical Capital". There are three specific steps that I use to help you acquire enough Critical Capital for financial independence:

• Calculate Critical Capital — how much do you need?
• Determine the future value of how much you have already saved — what will your current investments be worth in the future?
• Determine how much you still need to save — how can you change your cash flow or real estate equity situation in order to make up for the shortfall?

As a CMPS professional, I work as a team with your CPA, CFP® and other financial advisors to help you determine how much cash flow you need during retirement and the best way to generate that income. I can also refer you to a financial planner if you don't already have one. Either way, give me a call or send me an email to schedule a time to discuss your options in further detail.

PLEASE NOTE: THIS ARTICLE AND OVERVIEW IS PROVIDED FOR INFORMATIONAL PURPOSES ONLY AND DOES NOT CONSTITUTE LEGAL, TAX, OR FINANCIAL ADVICE. PLEASE CONSULT WITH A QUALIFIED TAX AND INVESTMENT ADVISOR FOR SPECIFIC ADVICE PERTAINING TO YOUR SITUATION.

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Jay Sibley
NMLS Number: 383991
Sibley Mortgage Group, LLC
Corporate NMLS Number: 1041547
jay@sibleymortgage.com

(321) 689-0089
919 Timber Isle Dr
Orlando, Florida 32828

   

How to Finance the Roth IRA Conversion Strategy

How to Finance the Roth IRA Conversion Strategy

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What is a Roth IRA?

A Roth IRA is a retirement account where (1) you invest your money after you've paid taxes on it, and (2) you can withdraw your money without paying taxes on the withdrawals.

Traditional IRA	Roth IRA
Invest money before you pay taxes on it	Invest money after you pay taxes on it
Grow the money in the account tax-free	Grow the money in the account tax-free
Pay taxes when you withdraw the funds	No taxes when you withdraw the funds

What if you leave the funds in your traditional retirement account?

Consider a situation where you have a traditional retirement account worth approximately $300,000. Assume the market goes up by an average of 6% per year over the next 5 years and your account goes up in value to $400,000. You will need to pay taxes when you withdraw the $400,000 from the account. Assume you are in a 33% income tax bracket. Do you think your tax bracket and/or the income tax rates in the future will be higher, lower, or the same as today? Most people would agree that tax rates will probably be higher - especially given the enormous US federal budget deficit. Even so, let's assume your tax bracket in the future is the same as today, around 33% in our example. When you withdraw the $400,000, you will need to pay $132,000 in taxes (33%). If you leave the money in the account to be inherited by your heirs when you die, they will need to pay income taxes on the money when they take distributions, and they are required to take distributions over their life expectancy. They also might need to pay estate taxes on the funds, depending on the value of your estate.

Why Convert the Funds from a Traditional IRA into a Roth IRA?

In the example above, let's assume you convert the $300,000 into a Roth IRA. In this case, you will not need to pay any taxes at all as you withdraw the funds when the account goes up in value to $400,000. However, you will need to pay taxes now on the $300,000 ($99,000 in taxes assuming a 33% tax bracket).  In this example, you would save at least $33,000 in taxes by paying the 33% tax now on the $300,000 account value instead of later on the $400,000 account value. Your savings will be even greater if tax brackets are higher in the future and/or if the retirement account goes up in value more than expected. If you don't take the distributions yourself, the funds will be distributed income tax-free to your heirs. If the market goes down, and the account loses value after the conversion, you could simply change your mind, "re-characterize" the account, and then convert the funds again later at the lesser value. This would save even more money in the upfront taxes that would be due.

Where to get the money for the tax bill?

In our example, you would need to pay approximately $99,000 in taxes to make the strategy work. You could pay the taxes out of the retirement account itself, but that would almost defeat the purpose of the conversion.  Instead, it may be smarter to take advantage of the record low mortgage rates that are currently available. You could bump up the balance on your home mortgage, and use the extra funds to pay the taxes on the conversion:

	Pay Taxes Using Cash on Hand	Pay Taxes Using Mortgage
Funds Needed	$99,000	$99,000
Opportunity Cost %	6%	-
Opportunity Cost $ (what you would have earned by keeping your money invested)	$5,940	-
After-tax Mortgage Cost % (based on 5% mortgage rate)	-	3.35%
After-tax Mortgage Cost $	-	$3,317
Annual Benefit	-	$2,623/year

As a CMPS® professional, I work together as a team with your financial advisor to help you evaluate your mortgage options in the context of your overall financial goals. Let me know if this idea is something you'd like to consider in more detail!

PLEASE NOTE: THIS ARTICLE AND OVERVIEW IS PROVIDED FOR INFORMATIONAL PURPOSES ONLY AND DOES NOT CONSTITUTE LEGAL, TAX, OR FINANCIAL ADVICE. PLEASE CONSULT WITH A QUALIFIED TAX AND INVESTMENT ADVISOR FOR SPECIFIC ADVICE PERTAINING TO YOUR SITUATION.

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Jay Sibley
NMLS Number: 383991
Sibley Mortgage Group, LLC
Corporate NMLS Number: 1041547
jay@sibleymortgage.com

(321) 689-0089
919 Timber Isle Dr
Orlando, Florida 32828