What percent of income to allocate to mortgage?

 There are various rules of thumb for how much of your income to allocate to housing costs. Traditionally about 1/3 of take home pay was the guideline but with housing costs, both rents and mortgages, rising dramatically, you need to dive a bit deeper into your finances to determine what is a "safe" percentage to pay for housing. Unfortunately many young Americans will look at the numbers and laugh. If only! That's when it's time to think about Plan B which might be getting a roommate, living with parents, or moving to a less expensive area. To commit to paying 50% or more of income for housing means you won't be able to afford to invest for retirement, pay off student loans, get married, buy a home, start a family, etc. Hard choices. Maybe it's time to investigate affordable housing initiatives in your city.

Check out this detailed description of calculating housing affordability: https://www.bankrate.com/mortgages/what-percent-of-income-should-go-to-mortgage/#percent-income

The Power of Compound Interest

One of the most basic economic concepts that affects personal financial decisions is compound interest, the idea that savings and investments grow based not only on contributions but is enhanced by interest earned on contributions and previous interest. Conversely, compound interest hurts borrowers, especially on high interest loans like credit cards.

Get informed with this helpful website with its easy to use caculator:

The Power of Compound Interest: Guide & Calculator

https://www.moneygeek.com/compound-interest-calculator/

 

Other useful calculator tools: 

Cost of Living Calculator - https://www.moneygeek.com/cost-of-living-calculator/ 

Mortgage Calculator - https://www.moneygeek.com/mortgage/mortgage-calculator/

 

 

 

Planning to refinance your mortgage?

A rush to refinance mortgages in light of the super low mortgage rates is facing a logjam of applications. According to Katy Mclaughlin writing for The Wall Street Journal, you need to take these steps:

1. Unfreeze your credit. Many people froze their credit to protect against fraud. Now is the time to thaw your credit history. Freezes and un-freezing are now free. You should be able to unfreeze your account online but plan ahead in the event that you need to send documentation to a credit bureau to prove your identity.

2. Get Appraisal Ready. If planning any home improvements complete them before the appraisal or hold off until afterwards. "Purge clutter and spiff up the home as much as possible."

3. Call your Accountant. if self-employed... you may need a year to date profit and loss statement from a CPA. This can be time consuming during tax season when CPAs are very busy (despite the recent roll back of filing to July 15). Request digital files of of your last two years of business and personal federal tax returns.

4. Examine Trust Documents. IF the title of the  home is held in a trust, some lenders need a full copy of the trust while others need only specific pages. It helps to have a digital copy. Review the document to be sure there are no typos, especially in name spellings. If there are you need to have the pages redrafted by the trust attorney and notarized.

5. Go on a Credit Diet. DO NOT open any new credit accounts during the mortgage process. Doing so will slow down the process.

Remember to freeze your credit after the process is complete.
Expect delays as the volume of applications swells and coronoa virus slows the process.

So you thinkk your mortgage is saving you on income taxes... think again

From my favorite financial guru, Jonathan Clements:

"Mortgage interest is tax deductible, but the tax savings are often less than we imagine—and there may be no tax savings at all. Suppose we’re married and our itemized deductions—including $13,000 in mortgage interest—total $26,000 in 2019. Sound impressive? Remember, we could always claim the $24,400 standard deduction for a couple filing jointly."

"In other words, that $13,000 of mortgage interest is reducing our taxable income by a mere $1,600—and perhaps saving us just $352 in taxes, assuming we’re in the 22% federal income-tax bracket. The standard deduction was claimed by an estimated 88% of tax filers in 2018, which means these folks got no tax benefit from their itemized deductions, including any mortgage interest they paid."

Check out his Humble Dollar website: https://humbledollar.com/

Should you retire with a mortgage?

More and more Americans are retiring with a mortgage. With low interest rates many financial advisers suggest it is better to have a mortgage and keep other funds invested. Some people delight in getting a tax deduction for mortgage interest. However, too many taxpayers who do not prepare their own taxes do not understand how little, if any, tax break they get on mortgage interest deduction. Before you make a decision, read what Nicholas Hopwood, president of Peak Wealth Management has to say about weighing the options: http://www.cnbc.com/2017/01/26/should-you-retire-with-a-mortgage-or-pay-it-off.html

Mortgage Prepayment Misconception

"You should never pay ahead on a mortgage."  Some homeowners have been brainwashed by the real estate industry that buying  a house you can barely afford is a good "investment" and that the mortgage interest deduction is the greatest tax benefit. Yes, the mortgage interest deduction is a terrific benefit for high income (high MTB) taxpayers, especially those who own two homes with large mortgages on both. In reality, low and moderate income taxpayers are subsiding the mega-mansions of the wealthy.  

Wall Street Journal columnist Jonathan Clements explains:  Assuming "you itemize your deductions—and that your itemized deductions are substantially higher than your standard deduction, which in 2015 is $12,600 for married couples filing jointly... and $6,300 for single individuals. If you aren’t itemizing, or your itemized deductions aren’t much above your standard deduction, all that mortgage interest is saving you little or nothing in taxes." (emphasis added).
You ONLY benefit from the mortgage interest tax deduction IF you itemize deductions AND then only to the extent that your total interest exceeds the standard deduction! The lower your marginal tax bracket, the less you benefit. 70% of taxpayers are in the 10 or 15% marginal tax brackets so you only get to deduct 10% (or 15%) of the amount of your mortgage interest that exceeds the hefty standard deduction. Do the math and quit fooling yourself!
Of course the real estate and mortgage industries perpetuate this myth that you should buy the most expensive house and largest mortgage you can qualify for. Have you forgotten about the housing bubble that brought down the economy in the 2008 crash? Buy a more modest house in order to free up money to invest for retirement and for your children's post-secondary education. AND for peace of mind.

Avoid Foreclosure with a Short Sale

The alarming statistics on homeowners struggling to make payments on mortgages they cannot afford and homes they can't sell is depressing but one bit of hope is available. The ABI Bankruptcy Brief reports: “Accelerating efforts to move troubled mortgages off their books, banks are offering as much as $35,000 or more in cash to delinquent homeowners to sell their properties for less than they owe, Bloomberg News reported today. Lenders have previously delayed or blocked short sales, but banks have now decided that the deals are faster and less costly than foreclosures. Banks are nudging potential sellers by pre-approving deals, streamlining the closing process, forgoing their right to pursue unpaid debt and in some cases providing large cash incentives." If you are in this situation or know someone who is, pass along this info.

Mortgage Foreclosure Review

Did you lose your house to foreclosure in 2009 or 2010? If so, the U.S. Office of the Comptroller of the Currency says you may be eligible for a free independent review of your case. Independent foreclosure reviews let borrowers who faced foreclosure on their primary residences between January 1, 2009 and December 31, 2010 request reviews of their cases if they believe they suffered financial injury as a result of errors in the foreclosure processes of these servicers: America’s Servicing Company, Aurora Loan Services, Bank of America, Beneficial, Chase, Citibank, CitiFinancial, Citi Mortgage, Country-Wide, EMC, EverBank/Everhome, Freedom Financial, GMAC Mortgage, HFC, HSBC, IndyMac Mortgage Services, MetLife Bank, National City, PNC Mortgage, Sovereign Bank, Sun-Trust Mortgage, U.S. Bank, Wachovia, Washington Mutual, and Wells Fargo. Visit http://www.occ.treas.gov/news-issuances/news-releases/2012/nr-occ-2012-1.html for additional information.

Mortgage refinancing

Mortgage rates are at rock bottom right now so it's a good time to consider refinancing your mortgage. Kiplinger's magazine (Feb. 2012, p. 45) recommends: use the calculator at http://zwicke.nber.org/refinance to determine the optimal refi rate for your situation. Then sign up at www.mortgagemarvel.com to receive email updates as lenders offer rates that meet your needs. If you want lenders to contact you, sign up at www.lendingtree.com

How expensive a home should you buy?

Whether you currently own a home or are in the market to buy, some national statistics shed slight on the question of how expensive a home to purchase. 

The traditional rule of thumb has been to spend no more than 2.5 times your annual income on a home. The acronym PITI stands for principal, interest, taxes, and insurance.  So PITI includes your monthly mortgage payment (principal & insurance), property taxes, and HO insurance premium but should also include any homeowner’s association fee and mortgage insurance premium.  It is this total, not just the mortgage payment, that should be 30% of your income or less.  

A recent Wall Street Journal article (8/17/11) reveals:  “For the U.S. as a whole, home prices were around 2.9 times incomes from 1985 to 2000. But during the housing boom, values increased at a much faster rate than incomes. The price-to-income ratio peaked at around 5.1 in 2005. Home prices have since fallen so that on average, nationally, prices are around 3.3 times incomes, or about 14% above the historical trend.” So homeowners can calculate your own ratio and see where you stand.  

Personally I have always bought homes that are well below the ratio so that we have more money for other goals and flexibility so my husband could switch jobs or take time off (a summer in Australia for us) and to allow for possible unemployment and unexpected expenses. It’s clear from these data that far too many Americans exceeded their capacity to pay (encouraged by real estate sales people, mortgage brokers, and media hype) during the housing bubble.

Reverse Mortgages for older homeonwers

Many older homeowners are "house rich and cash poor." A reverse mortgage can help turn their home into a stream of income once they are age 62 or older. the mandatory reverse mortgage counseling is provided free by the USU Family Life Center HUD-approved RM counselors. For an appointment or more info call: 435-797-7224.

For trustworthy information on reverse mortgages from the National Council on Aging, read: Use your home to stay at home: A Guide for Older Homeowners Who Need Help Now http://www.ncoa.org/news-ncoa-publications/publications/ncoa_reverse_mortgage_booklet_073109.pdf

Avoiding Foreclosure

Due to the subprime mortgage mess and high unemployment, more homeowners are facing possible foreclosure. The US Dept of Housing and Urban Development website offers help and guidance.
http://portal.hud.gov/portal/page/portal/HUD/topics/avoiding_foreclosure

Beware of foreclosure rescue scams!