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Deductions Aren’t the Only Way to Save on Real Estate Taxes

by NerdWallet

By Bill Brown

Learn more about Bill on NerdWallet’s Ask an Advisor

The mortgage interest deduction and the state and local property tax deduction are probably the best-known tax incentives for homeownership and real estate investment.

That’s no surprise. Roughly 9 out of 10 home buyers borrow money to buy a home, meaning they likely pay some form of mortgage interest. And property taxes are a near-universal expense for homeowners. Both deductions are crucial to making homeownership possible for the average buyer.

But there are other real estate-related tax incentives that might not be as familiar.

Capital gains exclusion

All homeowners hope their property will appreciate. The flip side is that anyone selling an asset that has gone up in value may get hit with a tax bill for the profit, also known as the capital gain. Thankfully, homeowners have some help in their corner.

An individual selling his or her principal home can qualify for an exclusion of up to $250,000 in capital gains, and married people who file jointly may qualify for an exclusion of up to $500,000. There’s no need to report gains up to these limits on a tax return.

To take the exclusion, sellers must pass the IRS’ ownership and use test, but it’s fairly straightforward. Essentially, they must own the property and have used it as a primary residence for a total of two out of the five years preceding the sale. Even if owners currently rent the property and depreciate it — as we’ll discuss shortly — they might still meet the use and ownership test and qualify for the exclusion. And even if sellers haven’t lived in the home during the past five years, they might qualify for a partial exclusion.

That’s a big help, as well as a recognition of the fact that millions of Americans depend on their home to build wealth throughout their lives.

1031 like-kind exchanges

The “1031 like-kind exchange” sounds like it’s ripped right from an accountancy textbook, but it’s actually fairly easy to understand. Let’s say a person owns a single-family, detached rental home as part of an investment portfolio. If the home appreciates, the owner will likely owe capital gains taxes in the event of a sale — unless he or she uses the proceeds to buy a condominium in a market with higher rents.

Because the single-family home and the condo are both investment properties, tax law treats them as “like kind.” And because this transaction is a “like-kind exchange,” the owner won’t pay capital gains tax until he or she sells the new property.

This gives investors an incentive to put any realized gains back into the economy rather than pocketing them. And it’s a big deal: Major real estate investors and mom-and-pop investors alike can benefit.

Depreciation on rental property

Homeowners who rent a portion or all of their property might be able to “depreciate” that asset, which means deducting some of the cost of the property each year on their tax return. That could result in a significant income tax deduction.

If you do earn money on the sale of your home after depreciation is taken into account, you’ll generally owe tax on the depreciated portion at the 25% “depreciation recapture” rate. Any other gains will be taxed as capital gains.

Changes may be coming

For more than a century, the United States has recognized the benefits of homeownership and real estate investment. It strengthens communities and helps individuals grow nest eggs for themselves. However, Congress is considering tax reform proposals that could have sweeping implications for real estate incentives. That’s something to keep an eye on.

Everyone’s tax situation is unique. Before you count on any of these incentives, you may want to talk with a tax professional. But if you’re ready to take the plunge into homeownership or real estate investment, tax benefits — some obvious and others perhaps less so — are out there.

Bill Brown is the incoming president of the National Association of Realtors.

The article Deductions Aren’t the Only Way to Save on Real Estate Taxes originally appeared on NerdWallet.

Outdoor Home Renovations? Think Budget and Scope

By Nino Sitchinava

Many homeowners view their outdoor spaces as their own personal oases, places where they can relax, dine and spend time with their friends and loved ones. In light of this, it makes sense that homeowners consider investing in major features that will transform their outdoor areas into additional living spaces.

Like any home-renovation project, however, outdoor renovations can easily get out of control if you don’t have a good handle on how much things will cost, what your goals are and whether you’re doing the work yourself or need professional help.

Before you dive into an outdoor improvement, take these key considerations into account to help you stay on budget and ensure that your project is successful.

Match plan to budget

One of the key factors in the success of any outdoor project is determining a realistic budget long before you put shovel to topsoil. Only once you’ve decided what you’re comfortable spending can you define the scope of your project.

The 2016 Houzz Landscaping & Garden Trends Study, conducted among registered users of the residential remodeling website, found that 88% of respondents had done or planned to do substantial renovations or complete overhauls, while only 12% had done or planned to do minor updates. Knowing the scope of your plans in the beginning will help you get a basic sense of what the project will cost you.

In the Houzz study, 9 out of 10 homeowners working on minor updates spent or planned to spend less than $5,000, but substantial updates called for bigger budgets — more than 2 in 5 homeowners working on a complete overhaul spent or planned to spend $20,000 or more.

Having a general understanding of the projects that are most popular among outdoor renovators can also be helpful as you develop your budget and scope. Across all outdoor projects reported in the study, many homeowners were updating outdoor systems such as irrigation and lighting (82%), beds and borders (80%), and structural elements such as patiosterraces and gazebos (72%).

The costs of these projects vary significantly based on a number of factors, such as project nature, scope and professional involvement. For example, while most standard outdoor systems such as irrigation or lighting in medium to small yards can be upgraded for less than $2,000, updates to beds and borders can range from a few hundred to thousands of dollars. Renovation of outdoor structures is typically quite expensive and can easily start at a few thousand dollars and go up based on the type of structure and the extent of upgrades.

Pick your priorities

The next key factor to consider: What are you trying to accomplish with your renovation?

If outdoor living is top of your mind, you might concentrate on adding outdoor furniture, a fire pit or cooking features to enhance comfort. If a low-maintenance space is a top priority, you might focus on adding plants that require little care and are resistant to cold, drought and wildlife.

When it comes to design, outdoor renovators most valued one that complements the style of their home (46%), promotes outdoor living (45%) and is stylish and beautiful (43%).

In terms of function, a space that’s easy to maintain ranked highest for homeowners (80%), followed by an area suitable for group gatherings and entertainment (49%).

Beyond creating an outdoor space that is aesthetically pleasing and easy to spend time in, many homeowners tackled specific challenges during their projects. Top issues included drainage troubles, lack of privacy, and drought or water shortages. Identifying your outdoor pet peeves or pressing concerns should make it easier to set project scope and budget. This will help you avoid project-scope creep.

Hiring a professional

More than half of outdoor upgraders in the Houzz study hired a landscape contractor or landscape architect/designer (52%) to help them bring their vision to life — and for good reason. Landscaping professionals can open your eyes to a wide variety of options for your space that you might not be aware of, provide guidance for staying on schedule and budget, and tackle projects for which specialized skills are particularly beneficial. Certain projects also require the hiring of licensed professionals to comply with local regulations.

Once you determine your budget, scope and top priorities, consider meeting with a professional for an initial consultation to discuss what you have in mind for your project. Finding the right landscape contractor or landscape architect can make an entire project come alive. You may be surprised at how reasonable the professionals’ fees are compared with their contributions to the project and the quality of the final outcome.

An outdoor makeover can make an enormous difference in how you and your family enjoy your time at home. In fact, after the completion of their outdoor project, 75% of homeowners reported resting and relaxing more often in their yards, 64% did more gardening, and 55% entertained more frequently in their outdoor areas. Keeping these tips in mind will help ensure that you not only complete your project without damaging your finances but also achieve an ideal outdoor space that you and your family will enjoy for years to come.

Nino Sitchinava is principal economist at Houzz, a residential remodeling and design platform and community.
This article originally appeared on NerdWallet.

Part of the process of deciding whether to refinance your mortgage is figuring out when you would break even. ​ Without knowing that, you may be shocked to learn that it could be years before you start saving money.

Look, this isn’t going to require IBM’s Watson to calculate. In fact, you just took an important first step: Simply thinking about a break-even point puts you ahead of the game.

Consider the reason you’re refinancing

Your break-even point is how long it will take to actually save money — considering the time it will take to recoup all of the costs of a new loan.

“The simple calculation for your break-even point is calculating the fees and the closing costs and dividing those by the savings,” says Jared Maxwell, vice president at Embrace Home Loans. But to make a financially sound decision, you may have to look beyond breaking even.

“It really starts with the question, ‘Why are you refinancing?’” Maxwell says.

Maybe you’re looking to lower your monthly payment, or to shorten the loan term and reduce the interest you pay over the life of the loan. Of course, there can be other reasons to reset your home loan — such as a cash-out refinance to tap your home equity or a refinance to eliminate mortgage insurance premiums. You’ll just need to consider your costs and goals.

And when it comes to the question of “Should I refinance?,” Joshua Askins, the Texas regional mortgage sales manager for BBVA Compass, says forget rules of thumb.

“There are some general rules of thumb that you may have heard along the way, [such as] ‘it makes sense to refinance if you lower your rate by half of a percent or 1%,’” Askins says. “But each situation is different.”

Compile all the costs to refinance your mortgage

Now that you’ve pinned down the “Why?,” look for the “How much?’” Generally, the costs of a refinance will be fees and closing costs, including:

  • Bank fees: Such as origination or application fees, as well as any points that the bank may charge.
  • Title costs: Including a title search and insurance.
  • Third-party costs: Such as an appraisal or attorney’s fees or the cost of a credit report ordered by the lender.
  • Escrow charges: For taxes, insurance, etc.

Each lender you shop will give you a loan estimate form detailing all the costs you’ll have to pay when you apply. It’s always a good idea to apply to more than one lender to make sure you get the best deal.

» MORE: Calculate your refinance savings

Calculating your break-even point

Now, it’s time to calculate your savings. Let’s consider an example.

Say you’re five years into a 30-year mortgage and your refinancing goal is to lower your monthly payment. If your new loan will lower your payment by $100 per month and the cost of the refinance is $3,000, it will take you 30 months to recoup that cost. There’s your break-even point.

Everything beyond that 30-month break-even point will be cost savings. Yeehaw, money in your pocket!

However, there is some small print attached to this savings celebration: Your savings may vary if you extend the term of the loan.

If the number of months that you’ll pay on your new refinance significantly exceeds the number of payments that remained on your original loan, you could be paying a boatload of extra interest.

“You have to make a decision on whether the reduction in payment outweighs, to you personally, the extension of the term of the loan,” Askins says.

Big savings beyond breaking even

If you want to pay off your home loan in fewer years by refinancing to a shorter term, then your savings can multiply beyond the break-even point. When you refinance to a shorter term, it’s not about having a lower monthly payment but about saving big money in total interest.

“If you took out a 30-year loan and started out with a rate of 4.5% and you’re now five years into that loan, it’s very possible that you could refinance to a 15-year term or perhaps a 20-year term, at the very same rate,” Askins says. “The monthly payment could go up a little bit … but you would literally save not only the time but tens of thousands of dollars, in those instances, in interest paid to the bank.”

Consider other factors

So there’s more to a refi than just breaking even.

“There are other factors that come into play, such as how long have you held the mortgage and how much have you paid down,” Maxwell says. He also thinks it’s important to consider whether the home you’re in today is your “forever” home or just “for now.” That can impact how long of a break-even point makes sense.

And if you’re looking for more than just a back-of-a-napkin calculation, this refinance calculator can show you your break-even point and total savings in practically no time.

Hal Bundrick is a staff writer at NerdWallet, a personal finance website. Email: hal@nerdwallet.com. Twitter: @halmbundrick.

The article If You Refinance a Mortgage, When Will You Break Even? originally appeared on NerdWallet.

Small Homes Can Offer Big Returns

by NerdWallet

When shopping for a new home, bigger is better, right? When it comes to roomier closets and more spacious kitchens, probably — but not so much when considering the return on your investment. According to a NerdWallet, analysis of three years of data from Realtor.com for 20 of the largest U.S. metro areas, smaller homes generally appreciate at a faster rate than larger abodes.

» MORE: In the market for a home? Check out current mortgage rates

NerdWallet looked at Realtor.com’s data for home listing prices in each of the 20 largest metro areas by population (other than New York City and Philadelphia, which had insufficient data) from 2013 to 2016. Homes for each metro area were lumped into four equal groups, or quartiles, based on square footage, each relative to the median home size in that area. From there, we calculated the compound annual growth rate of listing prices.

To see the full methodology, click here.

Key takeaways

  • Smaller homes see prices rise faster: While individual market dynamics and trends vary, in 17 of the 20 metro areas analyzed, listing prices of the smallest 25% of homes grew fastest when calculated as a percentage. The median annual growth rate for the smallest quartile of homes was 8.9% from 2013 to 2016. The second-smallest group of homes had the second-fastest growth rate, with median annual growth of 7.4%.
  • Prices in Florida appreciated fastest: The two metro areas with the fastest rate of price appreciation among the smallest homes are both in Florida. Miami-Fort Lauderdale-West Palm Beach saw the most drastic growth, as the smallest quartile of homes appreciated by 19.5% each year from 2013 to 2016. The metro area with the second-fastest appreciation of small homes was Tampa-St. Petersburg-Clearwater, Florida, where the smallest quartile of homes appreciated by 16.6% annually.
  • Larger homes appreciate fastest by dollar amount: While the smallest homes appreciate fastest when viewed as a percentage, larger homes appreciate faster when looking at absolute dollar amount. This is simply because of the larger price tag of the home. For example, the smallest homes in the metro areas we analyzed appreciated just over $57,535 on average between 2013 and 2016. Over the same period, the largest homes saw their prices rise $99,790 on average.

Why small homes might net better returns faster

These findings are not surprising, says Richard K. Green, a professor and chair of the Lusk Center for Real Estate at the University of Southern California. “We’ve had this now for about nine to 10 years, this return to center cities” being more desirable than suburbs, Green says. And homes in the center of big cities tend to be smaller than those in suburbs, Green noted, regardless of whether they’re historic houses or new construction.

In addition to increased demand for homes in city centers, another possible reason for the trend, Green says, is that new construction has been down nationwide dating back to 2007; that means inventory in general is low. Furthermore, many people who bought starter homes between 2004 and 2006 haven’t recovered all the value they lost during the housing crisis.

“They haven’t built up the equity that normally people would use for a down payment in order to move up, so you have a lot of people who are stuck in their starter homes,” Green says. While home prices are going up, he says, they’re not high enough to get people to leave their starter homes except in a few markets, such as Denver and Dallas. As a result, there often aren’t enough starter homes on the market to meet demand. This lack of inventory, paired with increased demand, means more price appreciation for smaller homes.

The breakdown

The following chart shows the annual home price appreciation rates in the 20 metro areas analyzed.

Emily Starbuck Crone is a staff writer at NerdWallet, a personal finance website. Email: emily.crone@nerdwallet.com. Twitter: @emstarbuck. Daniel Tonkovich is a data analyst at NerdWallet. Email: dtonkovich@nerdwallet.com

METHODOLOGY

NerdWallet analyzed Realtor.com’s data for home prices and home size from 2013 to 2016 in each of the 20 largest U.S. metro areas (other than New York City and Philadelphia, which had insufficient data). We determined the median home size in each metro area and divided homes for each metro area into quartiles relative to that size. From there, we calculated the compound annual growth rate in listings price over three years.

The chart below represents what size homes fell into each of the quartile groups for each of the metro areas analyzed.

Metro area Smallest 25% MidSmall 25% MidLarge 25% Largest 25%
Atlanta-Sandy Springs-Roswell, GA Up to 1,869 sq. ft. 1,869-2,696 sq. ft. 2,696-3,708 sq. ft. Above 3,708 sq. ft.
Boston-Cambridge-Newton, MA-NH Up to 1,610 sq. ft. 1,610-2,261 sq. ft. 2,261-3,278 sq. ft. Above 3,278 sq. ft.
Chicago-Naperville-Elgin, IL-IN-WI Up to 1,422 sq. ft. 1,422-2,102 sq. ft. 2,102-3,055 sq. ft. Above 3,055 sq. ft.
Cleveland-Elyria, OH Up to 1,319 sq. ft. 1,319-1,771 sq. ft. 1,771-2,562 sq. ft. Above 2,562 sq. ft.
Dallas-Fort Worth-Arlington, TX Up to 1,960 sq ft 1,960-2,714 sq. ft. 2,714-3,652 sq. ft. Above 3,652 sq. ft.
Denver-Aurora-Lakewood, CO Up to 2,324 sq ft 2,324-3,493 sq. ft. 3,493-4,804 sq. ft. Above 4,804 sq. ft.
Detroit-Warren-Dearborn, MI Up to 1,152 sq ft 1,152-1,729 sq. ft. 1,729-2,642 sq. ft. Above 2,642 sq. ft.
Houston-The Woodlands-Sugar Land, TX Up to 2,046 sq ft 2,046-2,704 sq. ft. 2,704-3,527 sq. ft. Above 3,527 sq. ft.
Los Angeles-Long Beach-Anaheim, CA Up to 1,448 sq ft 1,448-2,056 sq. ft. 2,056-3,061 sq. ft. Above 3,061 sq. ft.
Miami-Fort Lauderdale-West Palm Beach, FL Up to 1,668 sq ft 1,668-2,330 sq. ft. 2,330-3,410 sq. ft. Above 3,410 sq. ft.
Minneapolis-St. Paul-Bloomington, MN-WI Up to 1,725 sq ft 1,725-2,387 sq. ft. 2,387-3,426 sq. ft. Above 3,426 sq. ft.
Phoenix-Mesa-Scottsdale, AZ Up to 1,764 sq ft 1,764-2,304 sq. ft. 2,304-3,182 sq. ft. Above 3,182 sq. ft.
Portland-Vancouver-Hillsboro, OR-WA Up to 1,838 sq ft 1,838-2,492 sq. ft. 2,492-3,327 sq. ft. Above 3,327 sq. ft.
Riverside-San Bernardino-Ontario, CA Up to 1,484 sq ft 1,484-2,042 sq. ft. 2,042-2,858 sq. ft. Above 2,858 sq. ft.
San Diego-Carlsbad, CA Up to 1,689 sq ft 1,689-2,462 sq. ft. 2,462-3,571 sq. ft. Above 3,571 sq. ft.
San Francisco-Oakland-Hayward, CA Up to 1,458 sq ft 1,458-2,076 sq. ft. 2,076-3,043 sq. ft. Above 3,043 sq. ft.
Seattle-Tacoma-Bellevue, WA Up to 1,684 sq ft 1,684-2,383 sq. ft. 2,383-3,223 sq. ft. Above 3,223 sq. ft.
St. Louis, MO-IL Up to 1,239 sq ft 1,239-1,743 sq. ft. 1,743-2,580 sq. ft. Above 2,580 sq. ft.
Tampa-St. Petersburg-Clearwater, FL Up to 1,484 sq ft 1,484-1,983 sq. ft. 1,983-2,742 sq. ft. Above 2,742 sq. ft.
Washington-Arlington-Alexandria, DC-VA-MD-WV Up to 1,821 sq ft 1,821-2,748 sq. ft. 2,748-4,042 sq. ft. Above 4,042 sq. ft.

The article Small Homes Can Offer Big Returns originally appeared on NerdWallet.

7 Ways to Cover the Cost of Emergency Home Repairs

by NerdWallet

If you’re a homeowner and your water heater hasn’t gone out yet, just wait. They bust a seam or spring a leak or otherwise go on the fritz every 10 years, give or take. So you’ve got that to look forward to.

Unexpected home repairs are financial dings that never come at a good time. Water heaters are actually the least of your concerns; usually a few hundred bucks later you’re back to your hot showers. But a new furnace, air conditioning unit or roof — now we’re talking big-money repairs that can easily break your budget.

A recent survey by HomeServe USA reveals 25% of homeowners don’t have savings set aside for major household repairs. Nearly half of homeowners (48%) have had an emergency home repair in the past 12 months, according to the same survey.

When you face a major expense and lack savings to tap, where can you turn? Time to open up the NerdWallet first aid kit for emergency home fixes.

Here are 7 ways to cover emergency home repair expenses.

1. HELOC

home equity line of credit allows you to tap the value in your home as you need it. That’s perfect for home improvements, as well as those unexpected major expenses. But remember, a HELOC is a loan backed by your home, so spend wisely and pay promptly.

2. Homeowners insurance claim

Remember to check your insurance policy to see if a home repair emergency is covered. For example, a new roof may have at least some, if not all, of its replacement cost covered if it was damaged by a storm. You might not be able to see the damage from the ground, but a qualified inspector will find it for sure.

3. Government assistance

The FHA 203(k) and Limited 203(k) loan programs allow borrowers to buy or refinance a property, with additional funds added to the total loan amount to pay for repairs or upgrades.

The Department of Housing and Urban Development offers the Title I Property Improvement Loan program. Title I loans are FHA-insured loans issued by lenders, particularly for owners with little equity in their homes. The proceeds can be used for major repairs, or even for appliances and other household items that “make your home more livable and useful.” But no, that doesn’t include luxury items like a swimming pool or hot tub.

The U.S. Department of Agriculture can be a resource as well. The USDA Section 504 Home Repair program helps very-low-income homeowners in rural areas to repair, improve or modernize their homes. Grants are also available for homeowners 62 or older.

4. Community development programs

These programs are administered by state or local governments, agencies and financial institutions. For example, municipalities often use Community Development Block Grants issued through HUD to offer emergency repair loans or grants to local homeowners.

Sometimes there are restrictions to qualify for such programs, such as an income limit equal to 80% of the area’s median income. Other assistance plans may serve senior or disabled homeowners. But it’s worth checking with your local Office of Housing, Housing Services, Housing Authority or similarly named agency for details.

5. Disaster relief

If your emergency home repair is disaster-related, you may want to turn to relief organizations like the Red Cross or the Federal Emergency Management Agency. FEMA can offer funds for emergency repairs not covered by your homeowners insurance. This money is for major repairs for safety or sanitary living conditions, not to restore your home to its pre-disaster condition.

6. Credit card

This is probably our first instinct: Tap the plastic. But think twice. Your available credit may not be enough to get the job done. And if your card has a high interest rate, you might still be paying off that last home disaster when the next one strikes.

7. Cash-out refinance

And as a last resort, if you have equity in your home, you might consider a cash-out refinance for emergency repairs. The problem is, it can take time to shop for a good refinance rate.

Other resources

Additional aid for emergency home repairs can include Habitat for Humanity, local service organizations and nonprofits, church volunteers and community centers.

If you’re going through a rough patch and tap one of these resources, you may even be inspired to join in and help someone else once your home repair emergency has been solved.

Hal Bundrick is a staff writer at NerdWallet, a personal finance website. Email: hal@nerdwallet.com. Twitter: @halmbundrick

This article was written by NerdWallet and was originally published by Redfin.

The article 7 Ways to Cover the Cost of Emergency Home Repairs originally appeared on NerdWallet.

Why January Is the Best Time to Buy a Home

by

Why January Is the Best Time to Buy a Home

Spring and summer are historically the most popular times to buy a home. The weather is warm, inventory is high and the school year is winding down or done. But those who shop during this peak buying season also face more competition and higher prices. Buyers willing to brave the colder weather can benefit in multiple ways by purchasing a home now.

While winter homebuyers generally encounter a lower inventory, a September 2016 NerdWallet study found that they have the advantage of less competition. Additionally, the study showed that home prices in January are typically the lowest they’ll be all year. And in 2017, with a likely increase in mortgage rates on the way, there are several reasons why January is the best time to buy a home.

Prices are likely to only go higher

Home prices in January typically take a dip compared with the summer buying season. In its report, NerdWallet analyzed two years of Realtor.com data for the 50 most populous U.S. metro areas and found that in January and February, home sales prices were 8.45% lower on average than in June through August.

The outlook for January 2017, though, is a little different after an abnormally strong fall housing market nationwide, says Jonathan Smoke, chief economist at Realtor.com. Even though the summer seasonal cycle was still in play in 2016, he says, sales in October and November were much stronger than average, and housing prices in January haven’t dropped as much as in past years.

“[Home] prices are likely to increase even more than you typically see in spring because of low levels of inventory and because we didn’t see the normal weakness we see in fall,” Smoke says.

Less competition

Home prices may not have taken their usual dip this January, but Smoke says it’s still a favorable time to buy due to the ratio of inventory to sales — the number of homes on the market compared with the amount of competition. In 2016, there were almost twice as many people buying in June as there were in January, he says. This is in line with NerdWallet’s analysis of data from the previous two years, which found a 47% drop in sales in January when compared with July in the 50 largest metro areas.

Home inventory, meanwhile, doesn’t vary as much as price throughout the year, Smoke says, noting that there were 21% fewer homes on the market in the winter months of 2016 than in the summer.

“You basically face almost half of the competition with almost the same amount of inventory in the market,” Smoke says. This potentially means fewer homes with multiple bidders and more room for negotiating with sellers.

During nonpeak homebuying periods, there also tends to be a larger discrepancy between listing prices and sale prices, according to NerdWallet’s analysis. This can mean hidden savings for buyers. The September 2016 study found that in the previous two Januarys, the median home sold for $7,003 less than the listing price.

Mortgage rates expected to rise

After hitting historic lows, mortgage rates started rising in fall 2016. This year, economists expect additional rate increases, which means higher monthly payments for future homeowners.

“As we look toward spring and later in 2017, that’s another reason to buy in January and February,” Smoke says. “Because rates are expected to be about 50 basis points, or half a percent, more as the year goes on.”

With mortgage rates likely the lowest they’ll be all year — and with lower prices and less competition — January is an ideal time to make your bid.

Emily Starbuck Crone is a staff writer at NerdWallet, a personal finance website. Email: emily.crone@nerdwallet.com. Twitter: @emstarbuck. Dan Tonkovich is a data analyst at NerdWallet. Email: dtonkovich@nerdwallet.com.

The article Why January Is the Best Time to Buy a Home originally appeared on NerdWallet.

9 Facts About FHA Loans

by NerdWallet

9 Facts About FHA Loans

Think you can’t qualify to buy a home? Don’t give up hope. The Federal Housing Administration (FHA), a government agency, allows borrowers to take advantage of a low down payment, reduced closing costs, relaxed lending standards – and insures your loan, which is offered by a FHA approved lender.

So, if you are wondering, “what is an FHA loan?,” here are nine facts you’ll want to know about FHA loans.

 

  1. An FHA home loan allows a low down payment

Conventional lenders usually require a 20% down payment; you can pay less but are then required to buy private mortgage insurance for the lender’s benefit. That can add to your monthly payment.

FHA-approved lenders can offer an FHA loan with as little as 3.5% down. You still pay the FHA to insure your loan but the overall costs can be lower. And you can obtain the money for your down payment as a loan or gift from a family member, employer or charity. Most conventional lenders won’t allow that.

  1. FHA loans are easier to qualify for

Lenders who work with the FHA are willing to give you a break because the government is standing behind your FHA home loan. That gives first-time homebuyers a real opportunity, as well as residents of disadvantaged neighborhoods, who can find qualifying for certain types of mortgage loans a real challenge.

Borrowers with less-than-perfect credit can often qualify for an FHA home loan. Even if you have a bankruptcy in your history, you still have a shot at qualifying. In fact, your credit score can be as low as 500 and you may still qualify for a loan, within certain guidelines. And an FHA lender can finance multi-family homes, condos, as well as mobile and manufactured homes.

There can be income limitations to qualify for special financial loan benefits, such as down payment assistance. That’s a question to ask your lender.

  1. FHA home loans have lower interest rates

In addition to lower down payments, FHA-guaranteed loans generally have lower interest rates. Since the FHA doesn’t actually provide the financing or determine the interest rates of the loans it backs, the rate you pay for an FHA home loan will be negotiated with an FHA-approved lender.

  1. FHA loans can help you avoid foreclosure

The Making Home Affordable Program (MHA) is a government initiative to help borrowers who are suffering a financial setback. If you are in default on an existing mortgage, MHA may be able to help you reduce your loan payments and avoid foreclosure.

There are also options to assist unemployed homeowners as well as homeowners who are “underwater” – meaning you owe more on your mortgage than what your home is currently worth.

  1. An FHA loan can help disaster victims

Disasters seem to be occurring with increasing frequency: floods, landslides, earthquakes, tornadoes and all the rest. The FHA Mortgage for Disaster Victims Program provides 100% financing through approved lenders for the purchase or reconstruction of a home severely damaged or destroyed due to a disaster.

  1. The FHA can help you make home repairs and upgrades

If you have a bit of a “fixer-upper” on your hands, an FHA home loan or refinance may be just what you need. To start, the Energy Efficient Mortgage (EEM) program can help you lower your utility bills by financing the cost of adding energy efficient improvements to your home.

But other home improvements can be financed through an FHA 203(k) insured loan, as well. You can buy a home that needs some TLC, and get up to $25,000 on top of the purchase price for alterations, repairs and site improvement, all wrapped up in one loan. Look for an FHA-approved lender, such as a bank, credit union, savings and loan or mortgage company that is approved to make “Title I” loans. You can also search for a lender on the U.S. Department of Housing and Urban Development website.

  1. An FHA loan can help senior citizens gain retirement income

For homeowners who are 62 or older and in need of a boost in income, the FHA Home Equity Conversion Mortgage program can be a viable solution. If you live in your home and own it outright, or have a low balance remaining, a so-called “reverse mortgage” will allow you to remain living in your home while tapping a significant portion of the equity. It’s a loan you never pay back.

  1. FHA loans have lower closing costs

Anyone that has purchased a home knows there are a lot of fees due at closing. Appraisal fees, inspection, credit report and broker fees and commissions, origination charges – it can be a mighty long list. While the FHA doesn’t regulate or determine fees, the closing costs for an FHA home loan are generally lower than with a conventional mortgage. This is another item to be negotiated with your FHA-approved lender.

  1. FHA-approved lenders can offer different loan terms

Not every FHA-insured loan package will be the same. Lenders will determine the rate and terms to be offered, so as with any loan application, it is always a good idea to shop around and compare loan offers.

Rural and suburban buyers or homeowners might also want to check into the loans and services offered by the USDA.

Hal Bundrick is a staff writer at NerdWallet, a personal finance website. Email: hal@nerdwallet.com. Twitter: @halmbundrick.

The article 9 Facts About FHA Loans originally appeared on NerdWallet.

Fed Rate Hike: What It Means for Mortgage Rates

by NerdWallet

 

The Federal Reserve hiked short-term interest rates by 0.25 percentage point today, in line with nearly universal expectations. It’s the first time the central bank has raised rates in almost a year.

If you’re a current or would-be homeowner, you shouldn’t feel rushed into action. In fact, the biggest moves in mortgage rates have likely already happened — and the Fed had nothing to do with them.

But the Fed’s action, and the expectation that it will raise rates again in the coming months, has important implications for mortgage rates, as well as your ability to buy a home or refinance your loan.

What happened after the last Fed rate hike

Rates on 30-year fixed-rate mortgages averaged 3.97% prior to the last Fed rate hike on Dec. 16, 2015, according to Freddie Mac. Many experts predicted they’d move higher, but after briefly touching 4% just before the end of last year, rates retraced their steps through 2016, falling below 3.5% in July through October.

And then came the presidential election. Every mortgage rate forecast flew out the window when rates soared above 4%; they’ve remained there ever since.

The Fed can’t trump Trump

Nothing moves mortgage rates like a surprise presidential-election outcome — not even the Fed. Brad Hunter, chief economist for HomeAdvisor, a home improvement referral site, expects two or three additional Fed rate hikes in 2017, but that mortgage rates will only gradually move higher throughout the year.

However, Hunter says there are three things that could lead to a faster-than-expected increase in interest rates, and they all involve the presidency of Donald Trump.

1. Trump might appoint a new Fed chair. As president, Trump will be able to appoint two governors to the Federal Reserve Board right away and replace Chair Janet Yellen when her term ends in early 2018.

During the campaign, he said that the Fed has been holding interest rates at abnormally low levels. And if he builds a Fed that takes a more aggressive and activist approach to monetary policy, that would increase the likelihood of higher interest rates.

“On the other hand, Mr. Trump has also said that he ‘likes’ low interest rates, so his ultimate course of action on this matter is unclear,” Hunter says.

2. Trump might cut taxes. That could result in higher budget deficits, especially combined with his infrastructure spending plans.

“A higher budget deficit would force more bond issuance, which would tend to push bond prices down and interest rates higher. Also, if the fiscal stimulus causes the economy to accelerate, that could mean additional upward pressure on rates,” Hunter says. “And in this circumstance, the higher rates would be a reflection of positive news rather than negative.”

3. Trump might renegotiate the federal debt. The president-elect has floated a few ideas, including buying existing U.S. Treasuries at a discount. That debt would have to be retired — or replaced with lower-interest new bonds — in effect refinancing the debt. He also mentioned “renegotiating” federal debt, a move just short of defaulting on what have been the world’s most secure bonds.

Trump has since backed down from these proposals. But “If such an unprecedented event were to happen, investors worldwide would suddenly start to view our debt as risky, demanding to be paid a higher rate of interest,” Hunter says. “That would in turn further add to the deficit. Long-term rates, including mortgage rates, would go up.”

The 2017 housing and mortgage rate forecast

Barring such events, forecasters predict a trade-off: Rising mortgage rates will be accompanied by an improving economy and the potential for higher wages.

In its latest outlook, Freddie Mac said it expects to see “some additional interest rate increases following the recent movements.” The company, which provides capital to the mortgage market by buying mortgage loans from lenders, predicts 30-year mortgage rates will average 4.2% at the end of 2017.

Mike Fratantoni, chief economist for the Mortgage Bankers Association, also expects a steady climb. “What happened in the past month, we were looking to occur over the next year,” he says. “I think we’ve seen the big move already.”

Both the association and Freddie Mac are forecasting fewer homeowners will go through the mortgage refinance process.

“We’ve already seen some pretty clear signs that we’re on our way to that trajectory,” Fratantoni says. “In the last month, we’ve seen mortgage rates go up about half a percentage point, [and] we’ve seen refi application volume drop 28%.”

On the other hand, the association projects $1.10 trillion in purchase mortgage originations — homebuyers taking out new mortgages — during 2017. That’s an 11% increase from 2016.

The 2017 forecast from TransUnion, the credit analytics company, agrees that lower unemployment rates and a growing median household income will allow more first-time homebuyers to enter the market next year.

“We believe with improved economic conditions we could see nearly 3 million first-time homebuyers in 2017,” Joe Mellman, vice president and mortgage line of business leader at TransUnion, said in the forecast.

And in the coming year, would-be buyers and mortgage refinancers should still have the benefit of historically low interest rates — perhaps combined with improving personal finances.

Hal Bundrick is a staff writer at NerdWallet, a personal finance website. Email: hal@nerdwallet.com. Twitter: @halmbundrick.

The article Fed Rate Hike: What It Means for Mortgage Rates originally appeared on NerdWallet.

Mortgage Rates Today, Nov. 14: Post-Trump Rate Surge Continues

by NerdWallet

Mortgage Rates Today, Nov. 14: Post-Trump Rate Surge Continues

As we enter Week 2 after Donald Trump’s election win, mortgage rates are climbing higher yet again. Thirty-year and 15-year fixed rates both jumped by 11 basis points, while 5/1 ARM loans increased by a smaller margin on Monday, according to a NerdWallet survey of mortgage rates published by national lenders this morning.

It’s unclear what President-elect Trump and his forming administration will (or won’t) do about key finance and housing policy issues when he takes power in January.

House_pricetag

Mortgage Rates Today,
Monday, Nov. 14

(Change from 11/10)
30-year fixed: 4.10% APR (+0.11)
15-year fixed: 3.42% APR (+0.11)
5/1 ARM: 3.70% APR (+0.04)

 

Refinances to slow; expect to see more ARMs

As we enter the holiday season, when homebuying activity slows to a crawl in most places, rising mortgage rates are likely to bring refinances to a trickle, says Michael Fratantoni, chief economist and senior vice president of research and industry technology with the Mortgage Bankers Association.

In an interview with NerdWallet Monday, Fratantoni says that 10-year Treasury yields are up 40 basis points from before the election. The market hasn’t seen this kind of movement since the “taper tantrum” of mid-2013, when U.S. Treasury yields surged after the Fed gradually reduced the amount of money it was pumping into the economy following the Great Recession.

For refinance activity, this means a rapid drop in applications, because most refinance activity is directly tied to mortgage rates, Fratantoni says. The real test for the purchase market, which is more dependent upon buyers’ situations rather than rates, is where mortgage rates land in the spring, when homebuying activity typically picks up, he adds.

“It’s too early to tell if rates will keep going up, but we’ll probably be north of 4%,” Fratantoni says. “We’re all watching and waiting, and we’re curious to see how [Trump’s] policies get fleshed out.”

One thing’s for sure: As rates rise, borrowers will likely see more offers for adjustable-rate mortgages, Fratantoni says. Historically, when mortgage rates go up, there are more applications for ARMs, which offer a low rate for an initial period of a few years before resetting to a variable rate for the remainder of the loan term, Fratantoni says.

Currently, ARMs account for about 5% of mortgage applications, but in 2005-2006 (just prior to the housing crisis), ARMs reached a high 35% share of overall mortgage applications, Fratantoni says.

“Given all of the regulatory changes we’ve had, I don’t think we’ll be back at that level again,” Fratantoni says.

Homeowners looking to lower their mortgage rate can shop for refinance lenders here.

NerdWallet daily mortgage rates are an average of the published APR with the lowest points for each loan term offered by a sampling of major national lenders. Annual percentage rate quotes reflect an interest rate plus points, fees and other expenses, providing the most accurate view of the costs a borrower might pay.

Deborah Kearns is a staff writer at NerdWallet, a personal finance website. Email: dkearns@nerdwallet.com. Twitter: @debbie_kearns.

The article Mortgage Rates Today, Nov. 14: Post-Trump Rate Surge Continues originally appeared on NerdWallet.

How to Know if You’re Mortgage Preapproval Worthy

by NerdWallet

It’s the biggest hack to homeownership, and probably the most misunderstood: a home loan preapproval. How do you know when you’re financially set to get preapproved? Here’s what lenders look for and what you need to do if you’re not quite there.  

What you need for a mortgage preapproval

Unlike a mortgage pre-qualification, a preapproval is more than just a conversation with a lender. You’ll have to submit quite a bit of paperwork, including employment verification and checking, savings and investment records. The lender will pull a credit report on you.

The elements lenders look for in mortgage preapproval are the same industrywide:

  • A minimum two-year employment history in the same job or field.
  • A credit score of 620 or higher (in most cases).
  • A savings track record.
  • Financial asset records.
  • Proof of down payment (3% to 20% of the home price, depending on the loan program).
  • An “all-in” debt-to-income ratio of 43% or less.

Usually, there’s no charge to apply for a mortgage and gain a preapproval, though some lenders will seek reimbursement for the fee to pull your credit.

Job and credit history

The two-year employment history rule has a little leeway; for example, if you are a recent graduate and have proof of future income from your employer. However, transitioning from a W-2 pay stub job to self-employment — without a two-year track record for your new business — is a “definite hard stop in today’s mortgage world,” Don Bleuenstein, national sales director of retail home lending with Flagstar Bank in Troy, Michigan, tells NerdWallet.

He says a credit score of at least 620 is a “fairly hard rule.” But your credit score, which you can often obtain free of charge from a credit card company or bank, may not tell the whole story. While it’s hard to crack the code of all the different credit score models, Bleuenstein says that, in his experience, credit scores used for mortgages are tougher than the consumer credit FICO scores that have become readily available.

This may be because for mortgage credit scores, it is your middle score that counts among the three providers, TransUnion, Equifax and Experian.

Also, you probably can’t count on your spouse’s or partner’s pristine credit score if the home will be in both your names. With two or more borrowers, the worst scoring party’s middle score is used, Bleuenstein says.

Assets and down payment

“The ability to budget and save shows financial discipline,” says Staci Titsworth, regional manager for PNC Mortgage in Pittsburgh. “Sometimes clients receive gift money, and that’s fine, or they get a big bonus, and that’s great. We just have to show the underwriter the source of where those monies came from and that the monies were not borrowed.”

However, lenders know we don’t live in an ideal world, she says.

“Let’s face it, nobody’s perfect,” Titsworth says. “Life is not perfect. There are bumps in the road. People lose jobs; people experience job changes. People have unexpected expenses that they have to dip into their savings for. With that, it’s all about the documentation. It’s all about presenting their information to the underwriter that explains the financial ability to repay the mortgage.”

Debt and income

As for debt and income, Bleuenstein says lenders are looking for a debt-to-income ratio of 43% or less. That amount, called a back-end DTI, includes your mortgage payment.

“So if you make $10,000 a month gross [before taxes], $4,300 is what all of your debt on your credit report needs to be under,” he says, including your future house payment, monthly property taxes and homeowners’ insurance as well as your credit card, student loan and/or car payments.

But the numbers have a little wiggle room. Say your DTI is a bit high, perhaps 46%, but you’ve got a good credit score — for example, somewhere around 700 — and you have a 5% down payment in the bank; in that case you probably would get mortgage preapproval, Bleuenstein says.

When to start the mortgage preapproval process

Seeking a preapproval long before you start house hunting will accomplish one important goal: alerting you to any qualifying issues you may not be aware of.

“What’s prudent is: Get preapproved now if you think you’re going to buy in the next year,” so you have time to fix any glitches, Titsworth says. Although preapprovals are usually valid for only 60 to 90 days, a lender will extend them if you update information about your current financial condition.

And once you get mortgage preapproval, you can confidently shop for a home.

Hal Bundrick is a staff writer at NerdWallet, a personal finance website. Email: hal@nerdwallet.com. Twitter: @halmbundrick.

The article How to Know You’re Mortgage Preapproval Worthy originally appeared on NerdWallet.

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