This Common Mistake Can Kill Your Mortgage

If you're thinking about buying a home, you'll want to avoid this common mortgage mistake.

In order to qualify for a mortgage, you need to show your lender that you have a down payment and access to funds for closing. This money needs to come from documentable sources prior to moving it from your bank account to your escrow account. Unfortunately, a lot of people don’t do this, which can end up creating unnecessary challenges during the underwriting process.

Lenders are going to require at least 60 days of asset documentation from each source that your money comes from. This is required because your mortgage lender will need to verify that the money promised does exist and is eligible for use.

Let’s say you’ve put your money into escrow and, as requested, are doing your best to document the movement of money from the account going to escrow. This entails providing a bank statement specifically showing the money leaving your account and the money being accepted by escrow through an EMD (earnest money deposit).

If you can’t get a bank statement, though — say it’s the middle of the month and new statements are not out yet — the next best thing is to get a bank printout confirming the transaction and confirming the amount of money remaining in the account. (There are literally dozens of other things you also should be thinking about during the home buying process. Here are 50 ways you can get ready for buying your home.)

How a Bank Printout Can Help You Close

The bank printout must show the date of the transaction and the current timestamp of the printout, confirming that the money has been moved prior to the printout date. If the bank printout does not have this information, it will automatically halt the closing process of your loan and delay your loan contingency removal or extend your close of escrow date.

This method can be used for both your down payment and funds for cash to close. This is to provide authenticity for your account and to show clearly on paper that the account is yours and the money is yours to use. Banks and lenders require this information to be clear cut and “in your face.” Never assume that “common sense” will be enough.

Documents & Other Items You’ll Want to Avoid

Providing any of the following items in lieu of the bank printout will not work:

  • A bank statement with someone else’s name on it
  • Bank statement in trust
  • Pictures of bank statements taken from a smartphone or snapshot application
  • Bank printout with no timestamp and date

In addition, the bank printout and timestamp must show the remaining balance that is left in your account. For example, if you had $130,000 in assets and your down payment from this account was $50,000, your account statement should now show $80,000 remaining.

If you are looking to purchase a home, talk to a seasoned loan professional who can walk you through properly documenting the money required to buy your home. Also, take a few minutes to check your credit scores so you’ll know going in what kinds of terms you’re eligible for. You can get your two free credit scores, updated every 14 days, at Credit.com.

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Buying a House? You May Want to Avoid the 30% Rule

The 30% rule is a good place to start, but it’s not always the best gauge of how much should you spend on housing.

Ask someone the question, “How much should I spend on a house?” and there’s a good chance that they will respond with the 30% rule.

The 30% rule, which says not to spend more than 30% of your income on housing, is a good place to start, but it’s not always the best gauge of how much should you spend on housing. You don’t want to base your entire financial situation on it — especially since it’s not exactly clear what that 30% includes.

What Is the 30% Rule?

The 30% rule has been around since the 1930s, according to the Census Bureau. Back then, policymakers were trying to make housing affordable. They came up with the idea that you could spend about 30% of your income on housing and still have enough left for other expenses.

Over time, those numbers started to get used in home loans as well. A rough sketch of what you could afford, in terms of monthly payment, could be obtained by estimating 30% of your income.

Is the 30% Rule Right for You?

When deciding on your own 30% rule, it’s probably a good idea to base it on your take-home pay, rather than your gross income. Let’s say you bring home $3,500 a month. According to the 30% rule, that means you shouldn’t spend more than $1,050 on your housing payment.

Some folks like to use their gross income for this calculation, but that can get you into trouble in the long run. If you base what you spend on housing on an amount that you might not be bringing home, that can stress your budget.

Think about it: If your pre-tax pay is $3,800 a month, that lifts your max housing payment to $1,140. That’s $90 more per month. But the reality is that you are bringing home $300 less than your gross income. Trying to come up with another $90 a month could put a strain on your budget.

Don’t Forget About Extra Costs

You can use a mortgage calculator to figure out how much you should spend on housing. However, such calculators typically just include principal and interest. This doesn’t take into account other monthly homeownership costs.

If you’re thinking of buying an expensive house, don’t forget about other costs like insurance and taxes.

Experts suggest that you base your 30% figure on all your monthly payment costs, not just the principal and interest.

What Percentage of Income Should Be Spent on Housing?

But it goes beyond that for some homebuyers. When looking into buying a home or an affordable place to rent, don’t just base your estimates on your monthly payment. You should also include estimated utility costs and an estimate for maintenance and repairs.

HouseLogic suggests you budget between 1% and 3% of your home’s purchase price annually for repairs and maintenance. I like the idea of budgeting 2%. So, on a $200,000 home, that means you can expect to pay $4,000 for repairs and maintenance — about $333.33 per month.

Once you start adding in all the other aspects of homeownership, suddenly that 30% rule is less cut-and-dry. If you’re more conservative, adding up all the monthly costs of homeownership and keeping it all under 30% makes sense.

You’re less likely to overspend that way. But it might mean a smaller, less expensive home.

Consider the 28/36 Qualifying Ratio

Instead of relying on the 30% rule to answer the question, “How much should I spend on a house?”, consider using the 28/36 qualifying ratio.

According to Re/Max, many lenders use the 28/36 rule to figure out whether your finances can handle your home purchase. The 28 refers to the percentage of your gross monthly income that should be spent on your monthly housing cost. The 36 refers to the percentage of income that goes toward all your debt payments, including your mortgage.

So, if you make $3,800 in take-home pay, your monthly payment should be no more than $1,064. But, things get stickier when you calculate the 36% part of the ratio. Your total debt payments shouldn’t exceed $1,368. That leaves you about $304 for payments of other debts.

Let’s say your credit card and auto loan payments total $500. That means you’re going to have to adjust your expectations for what you can expect to pay for a mortgage. In fact, if your lender insists on the 36 part of the ratio, you have $196 less you can spend on your mortgage payment. And that might mean a less expensive house.

When figuring out what percentage of income you should spend on housing, base the calculations on your take-home pay. Even though Re/Max says many lenders use your gross pay for the 28/36 qualifying ratio, this way you’ll play it safe.

How Much Should I Spend on a House?

Everyone has to answer the “How much should I spend on a house?” question for themselves. However, the biggest reason to ditch the 30% rule is that you might not be comfortable with it.

Are you really comfortable spending 30% of your income each month on your housing? When you consider your other payment obligations, does it makes sense for you to spend so much on housing?

If you aren’t sure about the 30% rule, use your own rule. You might be more comfortable with 25% on all of your housing costs. Or perhaps you modify the rule. Maybe you spend 20% on mortgage and interest and keep your total housing costs to 25% or 28%.

No matter what you decide, the important thing is to be responsible with your finances. Only spend what you feel comfortable with on housing or rent.

Image: Portra

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How to Prepare Your Budget for Buying Your First Home

You're going to need more than just a down payment.

With the beginning of spring and more interest-rate hikes coming up, a lot of people are wondering if it’s time to make the jump from renter to homeowner. Of course, making such a move involves much more than browsing real estate listings and cobbling together enough for a down payment.

One of the most important things a first-time homebuyer can do is prepare their budget for this big financial event. We asked our partners and money-savers extraordinaire at Clark.com to share some of their best budgeting tips for people looking to buy a home this year. Here are Clark.com Managing Editor Alex Sadler’s responses, edited for length.

What Tweaks Should People Make to Their Budgets in Preparation for Buying a Home?

First of all, there’s a whole lot more that goes into buying a home than many people realize. I’m actually going through the process right now, and believe me, it ain’t like walking into a leasing office and signing up for an apartment.

When you’re preparing your finances for buying a house, here are a few steps you need to take first.

  • Get your credit in shape: The higher your credit score, the better deal you’ll get on a mortgage. The goal is to get approved for the lowest interest rate possible, so before you apply, make sure your credit is in good shape. [Editor’s note: If you’re not sure where your credit stands, we’ve got you covered. You can get your free credit report snapshot on Credit.com, and it’s updated every 14 days.]
  • Have enough saved for a down payment – and then some: A good amount to shoot for is 20% of the purchase price. If you put down less money, you still may be able to get a loan, but it’ll come with higher monthly payments. Plus, typically when you put down any less than 20%, you’ll need to have private mortgage insurance, which is another monthly bill to prepare for.
  • Prepare for other upfront costs: Home inspection (a few hundred dollars), closing costs (estimate between 2% to 5% of purchase price) and extra cash. Some lenders may require you to have some cash in the bank after the purchase is complete, maybe two to six months’ worth of mortgage payments.

In terms of your monthly budget once you’re in the house, a good rule of thumb is to spend no more than 25% of your income on housing – including mortgage payments, private mortgage insurance (PMI, if you need it), property taxes, homeowners insurance — all the monthly bills specifically tied to the house.

What Are Things Renters Don’t Have to Budget for but Homeowners Do?

Buying a house is exciting, but you need to go ahead and prepare yourself for unexpected expenses — that’s just the reality of owning a home. No more calling the landlord or leasing office to come fix something. Whether it’s a broken light bulb or a busted HVAC, the cost of that repair is coming out your pocket. Basically, you should overestimate how much money you’ll need to cover all of your expenses each month.

Give yourself a cushion to fall back on — cash savings you can dip into to pay for an unexpected repair or to cover your bills in case you lose your job or can’t work for a period of time for whatever reason.

A few other costs that come with owning a home: property taxes, homeowners insurance, disaster insurance required for homes in certain areas, higher bills (utilities, heating, air conditioning), maintenance — any and everything is your responsibility.

The bigger the house, the more expensive every single bill will be. Keeping up with regular maintenance is crucial in order to avoid bigger, more expensive repairs down the road

What Are Tips for Transitioning Your Budget From That of a Renter’s to a Homeowner’s?

Come up with a monthly budget to cover all of your expenses as a homeowner, and start living on that amount now. It will force you to save the money that you won’t have the luxury of spending once you own that house. Send it directly into savings so you don’t give yourself a chance to spend it.

How Can Homebuyers Make Sure They’re Not Biting Off More Than They Can Chew?

Just because you can qualify for a bigger house doesn’t mean you should buy one. The financial risks are extremely serious.

No one plans for unexpected setbacks like job loss, emergencies, medical issues — and if you aren’t prepared financially, one big unexpected event can be devastating not only to your short-term financial health but also your long-term finances. If you can’t pay the mortgage payments, the lender is coming after your house. If you have nothing to save each month, you’re giving up retirement savings and everything else that comes with being financially independent.

Bottom line: Buy less house than you can afford. And even on a less serious scale, you don’t want to live in a house that you can’t afford to furnish, or you can’t afford to take vacations because you have nothing left to spend or save each month.

Image: Geber86

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Time for Your Final Walk-Through? Make Sure You Have This Checklist

You're almost ready to close on your new home. Make sure you don't miss anything on your final walk-through with this handy checklist.

A few days before you sign the documents to finalize your purchase of a home, you’ll have the chance to take one last look through the property. The final walk-through is your last opportunity to confirm that the house is in similar or better condition than it was when it went under contract, and it’s also your chance to make sure no new issues have cropped up since the inspection.

What Should I Look for During My Final Walk-Through?

It has probably been weeks since you’ve seen the home and it’s exciting to walk through it again. You may be tempted to start mentally arranging furniture and picking out new paint colors while you’re there, but it’s in your best interest to put those feelings aside for now. This is your last chance to look for issues and work with the seller to address them before the home is officially yours. You should plan to spend 30 minutes to an hour walking through the home, paying careful attention to its condition.

In today’s competitive housing market, many buyers are waiving their home inspection to make a stronger offer. If that’s the case, it is especially important to focus on bigger red-flag items during your walk-through.

Before you head off to see your new home, it’s important you make sure you have your contract, inspection summary, a notepad, a camera, any photos you took of damage that needed repair, a cell phone and charger (to easily check that all electrical outlets are working) and, of course, your real estate agent. Make sure to coordinate with the sellers before deciding on a date. If you go too early they may not have finished moving out, and if you go too late, you may not have enough time to remedy any large issues that you spot.

Here are the big things to look for when making your final walk-through.

  • Are all agreed-upon repair items completed? (Ask to see receipts.)
  • Has the previous owner removed all debris, garbage and unwanted items? (Keep in mind, the house will likely not be professionally cleaned and will need a once-over when you move in.)
  • Has the yard been maintained?
  • Are all agreed-upon appliances still in the house and are they working properly?
  • Does the home still contain all furniture included with the purchase?
  • Are there any major holes or damages as a result of the previous owner moving out? (Normal wear and tear like nail holes can be expected.)

Here are some other things to look for once you have checked the above.

  • Do all lights and switches still work? (Keep in mind the home has likely been vacant for 30 or more days. If light switches don’t work, it could be due to burnt-out bulbs, which you’ll likely need to replace yourself.)
  • Do all power outlets work? (Use your cell phone and charger to quickly test whether outlets work).
  • Are appliances in working order?
  • Do toilets flush?
  • Do sinks, showers and tub spouts run? Can you spot any leaks?
  • Is there hot water?
  • Do sink and tub drain stoppers function?
  • Do all windows and doors open and close smoothly? And are all screens present and attached properly? Be sure to check that window latches and door locks are working properly.
  • Do the heat and air conditioning work?

And remember, your lender might run a final credit check before you close. You should keep an eye on your credit during this critical time. You can view a free credit report snapshot, which is updated every 14 days, on Credit.com.

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10 Places That Can Boost Your Child’s Future Income (& 10 That Won’t)

Where you raise your kids matters. Here are 10 counties shown to raise the earnings of kids who grow up there, and 10 counties to avoid.

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10 Cities Where Families Are Better Off Moving to the ‘Burbs (& 10 Where They’re Not)

The choice between living in the city and the suburbs can save families a lot of money. Here are the cities where that decision is easy.

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Can Refinancing to a Higher Mortgage Rate Actually Lower Your Debts?

Are you handling your debt the smartest way possible?

Your ability to save money can become compromised by the financial obligations you are paying in your life. If you have a mortgage and other consumer debts, it’s easy to stay the course, pay your monthly bills and rely on credit cards for emergencies. But taking action — namely, refinancing your mortgage —  could actually help you get better control of your cash flow. Allow me to explain.

The nuts and bolts of a good financial plan includes having “preferred debt,” which includes debt that is tax-deductible (a mortgage) and has no consumer obligations that are non-preferred (i.e. credit cards, student loans, car payments, etc.). Non-preferred obligations will compromise your ability to save money.

Consider the following scenario:

John Borrower has a mortgage of $300,000 with an interest rate of 3.875%. His mortgage is a 30-year fixed rate loan and his monthly payments are $1,410.71. John also has a car loan of $10,000 with an interest rate of 6% and a monthly payment of $500. His credit cards total $8,000 with an average interest rate of 16% on which he has to pay $400 per month, for a total of $2,310.71.

John Borrower has a great credit score because he always carried a small balance on his credit cards, has never missed a payment, and his credit history is squeaky clean. However, John’s car just broke down and he needs a new transmission that will cost him $3,500. Unfortunately, John’s mortgage payment and other obligations take up a majority of his income and now he has very little money saved up.

What does John do? He turns to his credit cards and goes further into debt. He is reluctant to make any changes to his financial burden. He has a great interest rate on his mortgage, but is he really getting ahead financially?

A Better Approach to Debt

There is a more proactive approach John can take that will be more consistent with having a strong financial foundation that will not only make him more creditworthy, but will also give him the ability to save and plan for the future.

The first thing to look at is all of John’s interest rates. True, his mortgage rate is low but the weighted average of his interest rates on all obligations is quite high. His interest payments alone take up a lot of extra money. Let’s look at the math:

Debt Balance Interest Rate Monthly Interest Payment
Bank of Bank Mortgage $300,000.00 3.875% $968.75
Car Lots Mega Car Loans $10,000.00 6.000% $50.00
Credit Cards (BULK) $11,500.00 16.000% $153.33

The total amount John owes in debts is $321,500, which includes his new credit card debt of $3,500 from the new transmission. If you multiply John’s amount owed by each individual interest rate and add it together, John is paying a total of $14,065.00 in interest alone each year.

Broken down: ($300,000 x 3.875%) + ($10,000 x 6%) + ($11,500 x 16%) = $14,065.00

Dividing the yearly interest paid by the total amount owed ($14,065 / $321,500) results in John paying an annual average interest rate of 4.375%.

If John were to refinance his current mortgage at that average 4.375% interest rate, something really interesting would happen to his payments. John is currently paying $2,310.71 each month in debt payments while interest is being accrued on his debts. By combining his debts under one mortgage at the higher 4.375% interest rate over a 30-year fixed-rate term, his monthly payments, interest included, would drop his payments from $2,310.71 to $1,605.20 each month.

Say what?

If John refinances his mortgage for the purpose of debt consolidation, his average interest rate does not change AND his monthly payments are lowered. Of course, because John is already cash poor, he’ll want to roll his closing costs into his mortgage refinance to keep his out-of-pocket expenses down. Suddenly, John Borrower is saving $705.51 each month. John can take that money and invest it or start a vacation fund. He can also put it to the side in case something else on his car breaks down. Regardless of his plans for the savings, the fact is that he is saving money and gaining control of his cash flow.

Having low rates and high rates on multiple forms of debts probably means you are going to be paying a higher rate of blended debt on all of your preferred and non-preferred obligations over time. The reality is that you can save through consolidation and fixing on one lower rate. It might be higher than your current lowest rate, but as John discovered, he could save money by increasing his lowest rate and combining his debts.

What’s Your Ideal Scenario?

The ideal financial scenario for any borrower is to have a single mortgage payment with no debt obligations and to have at least 6 to 12 months of savings (“reserves”) to be used as “back up.” This financial platform increases your borrowing power and is optimal for having a choice and control over your funds. (You can find more tips on how to determine how much home you can afford here.)

If you are thinking about taking out a mortgage or making some financial adjustments in your life, it’s a good idea to first check your credit scores to see where you stand (you can get your two free credit scores, updated every 14 days, on Credit.com.) Next, work with a mortgage lender who has the skill set and ability to really investigate your debts and can show you the real breakdown of your debts and what you are paying over time. You might end up realizing how much control you are missing out on by having payment obligations in an ongoing debt cycle. The numbers might astonish you.

Looking to a new abode? Be sure to avoid these mistakes first-time homebuyers make.

Images: andresr

 

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Here’s How You Can Control the Cost of Your Mortgage

Mortgages aren't cheap, but there are some ways you can keep your lending costs down when buying a home.

Mortgages are not cheap. Closing costs and interest paid over time to your lending bank will make the cost of having a mortgage very pricey over the 15-30 years that you have it. But, when it comes time to get your mortgage, you actually have more control over your loan costs than you think (even in the 2017 mortgage market).

Here are a few ideas on how you can keep costs down without cutting corners.

Remember the Rate-Lock

When you apply for mortgage loan financing and agree to move forward with the loan, there is something called a “rate lock”. Rate Locks are usually set for 15, 30, 45, or 60 days. The rate lock is a commitment; you are committing to your lender that you are going to take the mortgage interest rate and terms they have offered.

In turn, the lender is committing to giving you those terms with zero changes. The big “if” in this statement is whether this rate lock is set for a specific timeframe – 15, 30, 45 or 60 days. The average rate lock is 30 days for most mortgages. If your loan is locked for 30 days and it does not close by day 30, it will have to be extended in order to maintain that rate. If the lock is extended, the cost of your mortgage can change and your loan terms can get unnecessarily expensive. It is not uncommon for a mortgage that started with zero points to end up with pricey discount points due to a lock extension.

You can avoid this, though. The speed and momentum with which your mortgage loan is processed is directly related to how quickly you provide your lender with documentation and requested items throughout the process. The longer it takes you to gather and supply these items, the more it can cost you. You can reference the old adage, time is money.

Get Organized Before You Apply

When you first approach your loan officer and/or lender about mortgage loan financing, try to provide all of the documentation they ask for up front and before you begin. It’s also important to make sure your credit is in good standing and there are no errors on your credit reports before you begin the loan approval process. Doing so can help ensure you get the best rates and terms from your lender.

Once your loan has been underwritten and you are asked to provide additional documentation, get it back to them as soon as you can. The longer it takes for your lender to receive these items, the higher the chance that an extension will be needed. The ideal response period is 24-48 hours after the request is given. If it is going to take you more than 48 hours, or if you know you cannot get it quickly, let them know as soon as you get the request. Do not wait the 48 hours and hope that the condition will disappear. It will not.

Be Proactive & Prompt

The loan process is not always smooth. When items are requested by the lender, things can get frustrating for some consumers. These are some common comments made by consumers that come up during the process:

“I have already provided that piece of documentation multiple times.”

“Why do you need this?”

“I am waiting on my accountant and he won’t get it back for a week.”

Homebuyers can often feel frustrated because the reality of today’s lending environment was not made clear by the mortgage professional at the beginning of the process. If you are the type of consumer that understands that 5+5 will always equal 10 in any situation, prepare to be disenchanted by the mortgage loan process. In the current mortgage market, 5+5 will equal 10, 11, or 0. The environment you are entering is bureaucratic and heavily reliant on compliance to rules and regulation. These can often seem redundant and unnecessary but, remember, they were put in place to protect you.

If you can step back from the frustration and provide the items quickly, not only will you be ahead of the game but you will be saving yourself time and money. If you are prone to providing pushback to your lenders on requests, know that you are costing yourself in time, effort, and money.

Ask for clarification, call your lender, get on their calendar, bite the bullet and you will maintain control of your costs. The way to make sure you are set on the cost of your mortgage is to lock in the interest rate and terms, provide documentation within 24-48 hours, and be on call for any updates that your lender has.

There will always be circumstances beyond your control, but being proactive and on top of what your lender needs is the number one way to stay in control of your financial mortgage success.

Trying to buy your first home? Check out our roundup of first-time homebuyer mistakes you’ll want to avoid and visit our mortgage learning center for more answers to questions that come up during the process.

Image: Geber86

 

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8 Tax Breaks Most Homeowners Don’t Realize They Can Get

Whether you're a new homeowner or you've been in your house for years, you may want to find out if you qualify for these tax deductions for 2016.

It’s tax season again, and if you bought a new home in 2016, you want to be sure you don’t miss out on one of the numerous tax deductions you could be eligible for. Even if you aren’t a new homeowner, there could be some deductions you might not be aware of that can help you maximize your tax refund.

We spoke with Mark Luscombe, principal analyst at Wolters Kluwer Tax & Accounting. He reviewed some of the tax deductions home owners should be aware of as they begin working on their tax returns.

1. Mortgage Interest

“In 2016, the IRS acquiesced in the Ninth Circuit Voss case, which changes the way the mortgage interest deduction is calculated,” Luscombe said. “The IRS now says it is allowed on a per taxpayer rather than a per residence basis.”

That means that, if you own a home with an unrelated taxpayer, you are now each entitled to a mortgage interest deduction of up to $1 million of mortgage principal for funds used to purchase, construct or improve a home and an additional $100,000 of principal for a loan secured by the home but where the funds are used for other purposes.

“This also creates another marriage penalty in the Tax Code since, if the two taxpayers get married, then they are just entitled to a mortgage interest deduction up to the $1.1 million limit,” Luscombe added.

2. Mortgage Insurance Premiums & Debt Forgiveness

The deduction for mortgage insurance premiums expired at the end of 2016 but is still available for 2016 tax returns. Likewise, the exclusion for mortgage debt forgiveness also expired at the end of 2016 but is still available for 2016 tax returns.

“In order to try to better determine if taxpayers are claiming the proper amount of mortgage interest deduction, mortgage lenders are now required to report on Form 1098 not only the mortgage interest received for the year but also now the principal amount of the mortgage, the date the mortgage originated, and the address of the property,” Luscombe said. So be sure to download or request a copy of your Form 1098 if you haven’t already received one in the mail.

3. Energy-Related Tax Deductions

There are two energy-related tax breaks that homeowners can qualify for.

  • The nonbusiness energy property credit expired at the end of 2016 but is available for 2016 tax returns.  This credit is a $500 lifetime credit for improvements such as energy-efficient windows, doors, insulation and roofs, as well as certain home systems.
  • There is also a residential energy efficient property credit for items such as solar and wind installations that currently extends through 2021 but is subject to phase-downs over its final years.

4. Capital Gains Exclusion

If you’ve owned and lived in your principal residence for at least two of the last five years, then the exclusion for gain on its sale remains available. The exclusion is up to $250,000 of gain for a single taxpayer and up to $500,000 of gain for joint filers, Luscombe said.

5. Inheritance of Property

When you inherit an asset, the cost basis of the asset is “stepped up to value” on the date of death, which helps you avoid capital gains taxes on that property. Here’s how it works: Let’s say your grandfather just died, leaving a home to you and your siblings. The home is valued at $500,000 at the time of your grandfather’s death, but the original price paid for the home, the basis, when he bought it 30 years ago was $100,000. While you and your siblings may have to pay estate or inheritance taxes depending on the size of the estate, you won’t have to pay capital gains taxes on $400,000 in gains on the house.

“Stepped-up basis on death remains available for a principal residence, as well as other taxpayer assets on death,” Luscombe said. “However, with discussions about eliminating the estate tax and shifting to carryover basis, it is not clear how much longer current law will remain in effect. Stepped-up basis means that the inheritor of the residence who then sells the residence would likely have minimal taxable gain because their basis would be stepped-up to the date of death value of the residence.”

6. Property Taxes

Currently, real estate taxes with respect to a residence may also be deducted, although tax reform proposals being discussed in Congress would eliminate that deduction.

7. Home Office Expenses

If you use part of your home for business operations, you may be able to deduct some of your business expenses. The home office deduction is available for homeowners and renters, and applies to all types of homes, according to the Internal Revenue Service, which provides details and a full explanation of the requirements to claim this deduction on its website.

8. Moving Expenses

If you moved because you changed jobs or your business relocated, or if you started a new job or business, you may be eligible to deduct your moving expenses. The IRS explains that you must meet the following criteria in order to qualify.

  • Your move closely relates to the start of work
  • You meet the distance test
  • You meet the time test

Again, you can find a full explanation of these criteria on the IRS website. And for more answers to all those question bound to pop up between now and April 15, check out our tax learning center.

Image: Portra

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4 Reasons You Should Make Biweekly Mortgage Payments

The vast majority of people make monthly payments on their mortgage either until they sell their property or the mortgage balance has been repaid. Like the beige paint on the walls in your apartment, monthly payments are fine, but maybe there’s a more appealing alternative. One choice is to split your mortgage payment in half, paying every two weeks instead of making one lump-sum payment each month.

Biweekly mortgage payments could actually save you more in the long term, says Jim Lestitian, senior loan officer at Federated Mortgage Corp.: “This is a great and easy way to prepay your loan (shorter term) and reduce the amount of interest paid over the term of the loan.”

When you pay off the principal more quickly, less interest accrues, and you also reduce the amount of time it will take you to pay back the loan. When biweekly mortgage payments are set up properly, it’s possible to accomplish just that.

In this post, we’ll break down the pros of making biweekly mortgage payments and show how this strategy differs from making additional mortgage payments.

4 Benefits of Biweekly Payments

  1. You’ll gain equity in your home a lot faster

Arguably the most valuable benefit of biweekly payment is that you can gain more equity in your home. Equity accumulates more quickly when you pay twice monthly, because the money you borrowed from the bank has less time to accrue interest.

Why does equity matter?

When you buy a house, the ultimate goal is to live in your home without owing the bank any more money. The amount of ownership you have in a home also fluctuates constantly with the current market value. The difference between the current market value of your home and your mortgage is called equity. Therefore, when your mortgage is completely repaid, the total value, or equity, in the house belongs to you. If you sell your house before your mortgage is repaid, some or all of the proceeds from your sale are used to repay the outstanding mortgage balance.

  1. You’ll pay less interest over time

When you first take out a mortgage, the bank gives you a fixed or variable interest rate. This is the “rent” the bank will charge, and it is typically applied to your balance daily. Since your “rent” is charged daily, you want to spend as few days as possible “renting” the bank’s money. In other words, pay back the principal of the mortgage as quickly as possible to reduce your overall interest expense.

Biweekly mortgage payments help to reduce your interest expense because instead of making one payment against interest and principal each month, you’re making two. While the two separate payments are individually smaller, they both have a more significant impact, because each payment slightly reduces the amount of principal. So, if less principal means the bank can charge less “rent,” then the total “cost” of your mortgage will be reduced with biweekly payments.

  1. You’ll pay off your mortgage faster

The third rider on this tandem bicycle of home financing is duration, or the length, of your mortgage. Most often, mortgages are based on 15- or 30-year terms. However, when biweekly payments are made, your mortgage’s principal is reduced more quickly, so less interest is charged. As a result, you simply won’t need the full term of your loan to pay back the balance.

  1. The secret extra payments

Why the emphasis on biweekly payments, rather than twice-monthly payments?

What is 52 divided by 2? OK, what is 12 times 2? These two problems produce two different numbers, don’t they? By making a payment on your mortgage every two weeks, you’ll make an additional two payments over the course of a year.

The inherent benefits of the secret extra payments compound the three perks listed above: you’re going to have a lower interest expense, by chipping away at your principal more quickly, thereby shortening the amount of time you will need to pay off the balance.

Though, just as there’s more than one way to build a house, there’s a second approach to the 13th payment: additional payments toward principal.

Biweekly Payments vs. Additional Payments

Biweekly payments are not your only option for a shorter, more inexpensive mortgage. Additional payments are a great alternative and applicable to any loan. An additional payment is entirely separate from your total monthly payment and then applied directly to principal. An additional payment can also be any amount you wish, made with any frequency that suits your budget.

Additional payments are totally within your control. In the event that biweekly payments are unavailable or not in your best interest, nothing is stopping you from saving one or more months of mortgage payments (a good idea regardless) and then contributing that balance directly to principal. This approach will simulate the secret extra payments created by biweekly payments, but without the need to adopt a biweekly structure.

Similar to biweekly payments, additional payments will reduce your total interest expense and loan duration. When you’re devoting additional cash to accelerate the repayment of a loan, however, you must consider if this is the best use for your money. For instance, the amount of your additional payment could be used to pay other debts, grow more liquid investment accounts, or increase your emergency fund. These are important considerations because you don’t want to find yourself in a position where you need money that is inaccessible due to being tied up in your home.

When you make an additional payment, be sure to call your lender and tell them to apply it to the principal. You would never want to find yourself in a position where you’ve sacrificed the benefits of an additional payment due to a clerical error by a bank employee.

4 Questions You Must Ask Before Signing Up for Biweekly Mortgage Payments

  1. Are biweekly payments available with my lender?

Just as every landlord won’t offer the same amenities, all lenders won’t offer the option to make your mortgage payments on a biweekly schedule rather than monthly installments. Since interest rates do not vary significantly from one lender to the next, most often this payment structure is used as an additional selling point to entice a potential borrower. So why would a lender not offer a biweekly payment structure to its borrowers?

Biweekly payments are more complicated to administer, feasibly doubling the amount of work on the part of the lender. In addition to being more labor intensive, biweekly payments also generate less income for the lender over the lifetime of the loan. Remember, a mortgage is just another product offered by a lender, so when you make biweekly payments, you’re essentially receiving a discount on the total price of your mortgage.

If your lender does not offer the option of a biweekly payment structure, third-party vendors do exist to fill the gap. These companies simulate biweekly payments by coordinating with your lender to fulfill your monthly mortgage payment on your behalf. Then, you make biweekly payments to the third-party vendor, most often with the addition of an initial and/or ongoing fee.

  1. Are there additional fees associated with a biweekly payment structure?

Since a biweekly payment structure means more work for the lender, many lenders charge fees to enroll. Lestitian often sees lenders or third-party vendors apply a $200 to $400 fee to establish a biweekly payment structure and/or charge an ongoing monthly transaction fee. Therefore, unless you are going to save more in interest by making biweekly payments than you’ll pay in fees, it probably doesn’t make sense to pay biweekly.

  1. When will my lender apply my second payment to my mortgage balance?

Lenders don’t always treat biweekly mortgage payments the same. Some lenders will apply your biweekly payments to your mortgage balance as soon as your payments are received. Other lenders will simply hold your first payment until your total payment has been received.

If your lender is not applying your biweekly payments immediately, there is no point in signing up for biweekly payments. Stick to the usual monthly payment or consider refinancing with a lender who will honor extra payments. The benefit of biweekly payments is only realized if the payments are applied to your mortgage balance immediately.

  1. How does my lender calculate interest?

Your bank will calculate the interest due on a daily, weekly, or monthly basis. This detail is important to note because it dictates how much value you will be able to derive from making biweekly mortgage payments.

If interest is calculated daily, then you will save 14 days of interest expense with every biweekly payment. Similarly, if interest is calculated weekly, you will save two weeks of interest expense, with every biweekly payment. The lynchpin for biweekly payments is if interest is calculated monthly, which is very rare. If this is the case, however, you will not realize any additional benefit by making biweekly instead of monthly payments. So you’re better off sticking to once-a-month payments.

The Bottom Line

Biweekly payments, when structured properly, are a great way to shorten the duration and lower the interest expense of your mortgage, all while enabling you to build equity in your home more quickly. Though remember that the devil is in the details.

Before signing on the dotted line, make sure that your biweekly payments are applied to your balance immediately and not held until the end of the month. You also need to be cognizant of how interest accrues on your mortgage and any associated fees, because both components play a major role in how much additional value you will gain from making biweekly payments.

Another point to consider is whether or not biweekly payments are even the best option for you. Your alternative option is to make additional payments toward principal, which can help to produce the same benefits as biweekly payments but without the lengthy commitment. Though whether or not biweekly payments are appropriate for you, your mindset is a prudent one. To be focused on strategies for building equity and reducing expenses as quickly as possible is likely to pay dividends for years to come.

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