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Are You Benefitting from the Mortgage Interest Deduction?

The mortgage interest deduction has been on tax forms for many years. Would it affect you at all if that deduction was no longer available?

There has been a lot said during the presidential campaign in recent months about taxes, mortgages, and deductions. One of the most hotly debated topics on the campaign trail is the mortgage interest deductions that you can claim on your taxes. While some politicians and lawmakers want to do away with this deduction, there are others who say we should keep it. A recent article in the New York Times questioned whether it is actually an effective deduction that benefits the majority of homeowners and society at large.

According to Joseph Rosenberg with the Urban-Brookings Tax Policy Center, most homeowners chose to not claim the mortgage interest deduction when filling out their taxes. The reason for this is because most of them do not itemize their deductions. In fact, according to Rosenberg, only about 30 percent of homeowners claim this tax deduction each year instead of taking the standard deduction.

Another finding by this policy center is that most of the taxpayers who itemized deductions on their tax forms were typically upper-middle class families and upper-class families. In those two categories, the households that earn between $100,000 and $500,000 benefit the most from the mortgage interest deduction.

So why are households with a higher income taking advantage of the mortgage interest deduction more often than the households with a lower income? The answer is simple – those are the households that stand to benefit the most from the deduction. According to the policy center’s calculations, this deduction for the households with the higher incomes can account for as much as 1.5 percent of their after-tax income. Compare that to the 0.3 percent and the 0.7 percent for households making $40,000 to $50,000 and $50,000 to $75,000 respectively, and you can see why the upper income brackets would itemize their deductions to take advantage of it. In addition to that, many of the people making between $100,000 and $500,000 have a vacation home. Under the current mortgage guidelines, they can deduct the mortgage interest on both of those homes, as long as it does not exceed more than $1 million all together. Some opponents of the deduction say we should do away with it since it is only benefitting the upper class households without offering much help to the lower income earners.

Proponents of the deduction have a different viewpoint. People like Robert Dietz, who is with the National Association of Home Builders, says that some households could be considered middle class even if they are earning $200,000 a year. In some of the metropolitan parts of the country, a $200,000 annual income could be considered average when compared to the surrounding households. The $200,000 income might sound high, but households that make this much are generally living in areas where the cost of living is much higher. Dietz also says that the highest rate of mortgage interest deductions where taken by homeowners between the ages of 35 and 45 – a time when they are buying their first home.

Where do you stand on the mortgage interest deduction? Are you for keeping it the way it is or doing away with it altogether?

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Choosing the Ideal Mortgage Products Based on Generational Differences

As you grow older, your mortgage needs change. But what types of mortgage products are available for buyers in different age groups and financial situations?

It may come as no surprise that the mortgage needs of a 70 year-old home buyer is different than those of a first-time home buyer in their 20s. According to an article last month by Marcie Geffner at MSN, the fact is that mortgage loan needs are different based on your age and where are you are at in your financial life.

Mortgage Loans for First-Time Buyers
There are many people who are fresh out of college and in a financial position to purchase their first home. According to Jim Pomposelli, a mortgage banker with Federal Savings Bank in Chicago, there are many people in their 20s who have been responsible with their finances and, as a result, they have great credit that qualifies them for purchasing a home. But with student loans hanging over their heads and very little cash in the bank, they have trouble coming up with a down payment.

For these younger buyers, there are two types of mortgage loans that are better than others. The first type is a low down payment conventional mortgage loan. With these mortgage loans, the typical 20 percent down payment is reduced to a 5 percent down payment which helps a first-time home buyer afford the loan. The second type of mortgage product that is attractive for young buyers is one that is insured by the government, such as a VA loan or FHA loan. These loans offer financial help to those who want to purchase a home but have very little savings to put towards the purchase of the home. For more info on these types of loans see the article here.

Products for the 30s and 40s Generation
For people who are in their 30s and 40s and already own their home, there are different mortgage products that are attractive to them. If they are not underwater on a current mortgage loans, a two-loan package may be the ideal financial move. This package is for homeowners who want to refinance their current mortgage or simply move to another home. With a two-loan package, the homeowner typically takes out a first mortgage on their current home at a low rate while also getting a home equity line of credit for financing their next home or for refinancing their current home. Generally, these homeowners have accumulated some assets and they are able to handle a higher amount of debt than the homeowners in the younger buying group.

If the homeowner in this age group is underwater on their mortgage, many of them have the option of taking advantage of the federal government’s HARP, or Home Affordable Refinance Program. The newest installment of this program designed to help troubled homeowners includes the provision of an unlimited cap on the mortgage borrower’s loan-to-value ratio. More information on this and other mortgage assistance programs is found here

Seniors and Retirees
There is a trend among homeowners who are approaching or already in their early retirement years to refinance their long-term mortgages into a shorter term mortgage, mainly a 15-year fixed mortgage. They are using the money that they are saving on their payments each month to put add to their retirement accounts. There are also many homeowners in this age group that are looking for inexpensive “fixer uppers” at a low price so they have something to do since they are no longer in the workforce.

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Reverse Mortgages: There is no such thing as "Free Money"

Sure, a reverse mortgage can fund your Caribbean cruises, and is generally tax-free and will not affect your social security or Medicare benefits, but reverse mortgages are not for everyone. Originally created to help seniors stay in their homes by converting equity in their homes to a sort of disposable income, reverse mortgages can end up being nightmares for seniors who cannot keep up with the terms and conditions associated with these types of loans.

Although reverse mortgages have been around since the 1960s, its growth was slow until the late 1980s when the Federal Housing Authority Insurance Program was signed into law and the first government-insured reverse mortgage was given.1 So, we’ve all heard of mortgages, but what exactly are reverse mortgages and how do they work?

As you pay off your mortgage to the bank each month, the equity you own in your home gets larger and the amount you owe decreases. A reverse mortgage is a type of loan available to seniors in which the homeowner can borrow against the value of his or her home and no repayment is required until the borrower dies or the home is sold or refinanced. Hence, as opposed to you paying the bank each month, the bank pays you instead. However, like a regular mortgage, you’re still required to pay real estate taxes and homeowner’s insurance.

Now let’s look at the types of reverse mortgages out there2:

Federally Insured Home Equity Conversion Mortgages (HECM): These are the most popular reverse mortgages out there and the first regulated programs on the market. Since 1989, the federal government, through the Federal Housing Administration (FHA) has insured HECMs.

Jumbo Reverse Mortgages: Also known as Proprietary Reverse Mortgages, were created to serve the unmet needs of the HECM market, specifically for those with higher property values. Although not federally insured, Jumbo reverse mortgages come with similar consumer protections and benefits.

So we all know there’s no such thing as a free lunch or “free money” in our case. Eventually the loan will have to be paid off, but when?

Scenario 1: When the borrower(s) have passed away.

Scenario 2: When borrower(s) have not lived in the home for 12 consecutive months.

Scenario 3: Borrower(s) decide to sell or refinance their homes.

The reverse mortgage will then become due if any of the 3 scenarios occur. The amount due will include the money borrowed, interest, and closing costs. Usually the loan is repaid through sale of the home or some other asset if a borrower’s heir wants to keep the home. As the reverse mortgage is a non-recourse loan, the amount a borrower’s heir ends up repaying will not exceed the value of the home at the time it’s sold.

Nonetheless reverse mortgages are costing some seniors their homes. A recent NY Times article by Jessica Silver – Greenberg noted, “Some lenders are aggressively pitching loans to seniors who cannot afford the fees associated with them, not to mention the property taxes and maintenance. Others are wooing seniors with promises that the loans are free money that can be used to finance long-coveted cruises, without clearly explaining the risks.” Hence, some seniors are being forced out of their own homes due to their spouses passing away and their names not being on the deed, or various other reasons regarding the terms and conditions of the reverse mortgage that may have been misleadingly explained to them by brokers.

The articles also noted that despite the fact that reverse mortgages have declined in recent years, the default rate for these types of mortgages is at a record high of 9.4 percent, up 2 percent from a decade ago. Seniors often cannot repay the huge debt needed to save their homes and are forced out with nowhere to go.

Overall, reverse mortgages were created to help seniors stay in their homes and enjoy life, and yes, in some cases they do serve their purpose. However, there are cases where they may end up taking homes away and leaving some homeless. Reverse mortgages aren’t for everyone and it is important to be cautious and think ahead before getting one.

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As Foreclosures Dwindle, Some States Still Feeling the Massive Pinch

While a decrease in the number of foreclosures in some states makes the housing figures look promising, there are some states where the number of foreclosures is about to spike.

There is some evidence that the housing industry may be on the mend. One of the big signs that we may be in a recovery phase is that the number of foreclosure filings has been dwindling. According to an article on CNBC, the number of foreclosures that were reported in the third quarter of 2012 was 531,576. Those numbers include the households that received a notice of default, bank repossessions, scheduled auctions and actual filing for foreclosure. That’s five percent fewer than the second quarter of this year and it’s an entire 13 percent fewer than the same time period last year. That’s a great sign that there is a rebound occurring in the housing market.

Unfortunately, those numbers may be somewhat deceiving. While foreclosures are down overall, those numbers do not take into account the foreclosures that are about to occur in several states. According to Daren Blomquist, the VP of RealtyTrac, “the other shoe is…being carefully lowered to the floor and…making little noise in the housing market.” But that’s about to change.

When it comes to foreclosures, the states fall into two basic categories – some states require a judge in order to proceed with the foreclosure proceedings and other states do not require a judge. In the states where a judge is not required for finalizing a foreclosure, the process gets pushed through quickly and with little delay. Those states include Michigan, California, and Arizona, among others. The states where a judge is required for a foreclosure include Ohio, Illinois, Florida, and New York. The exact figures for the number of foreclosures in these states are still somewhat sketchy, but it is not looking promising.

In 14 of the 26 of the judicial states, there was a spike in foreclosures this year when combined with last year’s figures. In fact, New Jersey experienced a whopping 130 percent increase in foreclosures this year compared to 2011. In New York, there was a 53 percent increase. Pennsylvania had a 35 percent increase. With the number of foreclosed properties increasing in these states, it’s going to be difficult for home prices to increase.

In some non-judicial states, the numbers are more positive. California, for instance, was one of the hardest hit states in terms of foreclosures. The number of foreclosures in The Golden State is still high, but they are down by about 45 percent when compared to the number from four years ago. Arizona is another state where foreclosures have dropped. The dwindling number of foreclosures in these states is making it difficult for investors to buy properties because the prices on the inventory is beginning to increase. In California alone, the number of homes that are priced on the lower end of the spectrum has plummeted by 40 percent, leaving first-time homebuyers in the state with yet another obstacle to overcome when trying to purchase a home. Combine that with the investors who are buying homes with cash and then turning around to rent those homes out and that brings down the number of homes available significantly as well.

While there is some promising news in the housing market, is it enough to call it a rebound? The next 12 months or so will help determine if tha is true or not.

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Mortgage Perks for the Wealthy

Two things come to mind when the name Mark Zuckerberg comes up. First, we have Facebook. Second, Zuckerberg is rich. In fact, he is a billionaire. So guess what the mortgage on his Palo Alto home in California is like. After refinancing, the rate Zuckerberg got was 1.05%. Yes, 1.05%. Surely that’s not a rate someone without substantial wealth can get.

Last week, in an article published by MarketWatch, AnnaMaria Andriotis highlighted perks that certain banks are using to lure wealthy homebuyers, and called it “the high-end version of a free toaster for opening a bank account.”

Wealthy property buyers can easily fork up cash to pay for their homes, but why pay everything at once when you can get a nice rate, especially when you’re rich and banks are enticing you with discounts on these mortgage rates, closing costs and "points," which you can pay upfront to obtain an even lower rate.

Of course rates like Zuckerberg’s 1.05% are not for everyone. It’s a rate for the billionaires. Not every wealthy person may have a billion dollars sitting in their bank account, but let’s say you have a quarter of a million dollars. That is quite a bit of money right? Enough for your kid’s four year private college education, and if you’re a Bank of America customer with at least $250,000 in the bank, that’s enough to give you a 0.5 percentage point discount on the so called “points” paid toward mortgages for attaining a lower rate.

Moreover, if you’re a millionaire and a Wells Fargo customer, you’re entitled to mortgage rate discounts as well. Closing costs can be reduced for Chase Private clients with assets between half a million to five million dollars in assets.

No doubt a lower rate can save you quite some money. Andriotis cited that just by reducing the mortgage rate a quarter of a percentage point from 4.05% (the average rate on large private mortgages) to 3.8% would save the borrower over $70,000 for a $1.5 million, 30 year mortgage.

Because of the attractiveness of some of these perks and the potential savings low rates entail, the “jumbo loan business has increased.” By targeting the rich, banks are essentially price discriminating. Wealthy borrowers are being offered rates and perks a normal person can’t get. Truth is, wealthy borrowers have a lower default risk as compared to less wealthy clients. And just like the way insurance works, the higher the risk, the more expensive the insurance and vice versa.

Nonetheless, Andriotis mentioned some very good points to consider before signing up for these bank perks in order to obtain a iscounted mortgage rate.

First, for those planning to keep their homes for a long time, for retirement, for their grandchildren, or for whatever reasons, skipping out on a discount in closing costs may lead to even more savings. The general idea is that a lower closing cost may translate into a higher mortgage rate, which in the long run is a bad idea.

Second, for those with substantial asset, leverage that fact and shop around for the best deal. All banks want wealthy customers.

Third, for those with cash, buying a home outright will help save on interest, but make sure to have some cash on hand in case of emergencies. The cost of borrowing money is not cheaper than paying mortgage interest, especially if you’re really in need of it.

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Mortgage Reduction Programs and Mortgage Settlements Giving Rise to Dramatic Increase in Mortgage Scams

There are many mortgage-related scams out there to watch out for. Do you know how to avoid becoming a victim?

Whenever there is a chance to seize an opportunity, you can bet the scammers will be there to take it. And that’s exactly what happened within just a short time after the federal government put the latest $25 billion mortgage settlement in place to help struggling homeowners. This settlement, which was reached earlier this year, makes some of the nation’s biggest banks be more proactive in their approach to help homeowners who need help with their payments.

In Alabama, for example, many of the homeowners who are struggling to make their payments have been receiving phone calls from people who are trying to scam them out of their hard earned money. The person making the phone calls promises the homeowner that they can receive cash payments from the settlement as long as they would give the routing number from their bank account.

Struggling homeowners in Illinois have been receiving similar phone calls and requests. The homeowners were receiving phone calls from people telling them that they did indeed qualify for a settlement amount from their lender. They only thing they were required to do was to pay a huge upfront fee for processing in order to get that settlement money.

But one of the more astounding stories comes from California, one of the hardest hit states in terms of foreclosures and troubled mortgage borrowers. According to The Washington Post, the Attorney General of California – Kamala Harris - received a phone call that told her she could receive some financial compensation from the settlement as well.

With vulnerable homeowners and the billions of dollars available in government aid, it is a perfect combination for scammers who know how to take advantage of people who are in need. And the more money that is available and the more vulnerable homeowners there are, the more creative the scams get. As a result, both state and federal officials have made an effort to help curb these types of crimes. For one thing, they have created task forces and put more investigators on the job to help catch the people who are involved in the scams. In some of the hardest hit states, including Nevada, California and Florida, officials have even held informational meetings and seminars to help disseminate information that will educate the public about the various types of scams and what to look for in a scam so they can tell the difference between a really good con job and the real thing. But despite all of those efforts, there are still many fraudsters who get through the cracks and continue to con people.

Patrick Madigan, an assistant Iowa attorney general, has helped officials in his state come up with plans to curb mortgage-related scams. However, according to him, it becomes “like a game of Whac-a-Mole.” He went on to say that once you get one fraud under control, several more pop up that must be taken care of.

Here is how serious the problem is: In the last three years, the Justice Department of the United States has filed almost 1,500 cases involving mortgage fraud. That includes about 3,000 defendants, according to an agent from the department. In those same three years, the prosecutions for mortgage fraudsters increased by more than 90 percent.

You do not have to be a victim, though. According to the FBI website, you can take some steps to avoid mortgage fraud. If you get phone calls, emails or letters from people or companies that say they can eliminate your mortgage debt for an upfront fee, it is definitely a scam. Also, never sign over the deed to your home – even “temporarily” – to anyone who claims they can help you with your mortgage payments. The best thing to do is speak directly with your lender and they can tell you if you qualify for any financial help from the recent settlement or if you have other options.

Speaking directly with your mortgage lender or identifying a new mortgage lender in your area to remortgage in the course of seeking remediation for your old mortgage is often the best way to seek appropriate advice. Identify a new mortgage lender that is lending in your location here.

Don’t let your vulnerability cloud your judgment. Make good and well-informed decisions when it comes to something as important as your mortgage.

Are Mortgage Fees Going Up in Your State?

Mortgage fees in five states are expected to increase and be passed down to new mortgage borrowers. Is your state one of them?

A proposal that was released this week by the Federal Housing Finance Agency would increase mortgage fees for mortgage borrowers in several states. The proposal, if implemented, would impact five states – New York, Florida, New Jersey, Connecticut and Illinois – and it would only apply to the mortgages that are secured by Fannie Mae and Freddie Mac.

The five states that the new proposal would impact are those states where it takes the longest to foreclose on a home. The decision was based on the length of time that it takes for the Federal Housing Finance Agency (FHFA) to take back the title to a home along with the costs of legal fees, property taxes and other expenses that the ban. According to the Wall Street Journal, there is a simple logic behind the new proposal – the longer it takes for a lender to foreclose on a home and retain ownership, the higher the fees are going to be. These are the five states where the average total carrying costs for homes are much greater than those of the national average. As a result, these create more costs for taxpayers and for Freddie and Fannie.

According to officials in these five states, one of the reasons that it takes longer for a foreclosure to occur is because many of the banks that made the deals with home buyers dismissed established foreclosure practices and, as a result, ran into problems with loan documents and “red tape.” The “robo signing” scandal that occurred two years ago in which some of the banks had used incomplete or faulty paperwork to make the foreclosure process quicker was one example. These issues caused the courts to virtually shut down the foreclosure process in some states.

Some representatives in Congress aren’t happy about the new proposal, though. Brad Miller of North Carolina said that this new legislation was nothing more than “bullying states that are protecting homeowners from foreclosure abuses.” He stated that the five states where it takes the longest to process foreclosures are simply doing their due diligence in making sure that the foreclosure process is done correctly so the “robo signing” disaster doesn’t occur again.

Fannie and Freddie are planning to increase the fees on mortgages in these five states by as little as 0.15 percent to as much as 0.3 percent of the loan amount. In terms of monthly payments, for a $200,000 mortgage on a 30-year fixed rate term, it could cost the buyer between $3.50 and $7 per month if these fees are enacted. This might not seem like a large amount, but it will be an unprecedented move in the industry as state-level mortgage prices could become the norm.

Do you think states should be singled out for added fees based on the amount of time it takes to foreclose on a property? Or is that going to be a signal to other states to expedite the foreclosure process, which could lead to more robo signing like problems?

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