Homeowners who itemize tax deductions can deduct the interest on up to $750,000 of mortgage balances used to buy, build or improve a qualified home. Here’s how to figure out the impact of that tax deduction: What’s your marginal income tax bracket? In our example, we’re going to use a tax bracket of 24%.
What’s your mortgage rate? In our example, we’re going to use a mortgage rate of 5%.
What’s your after-tax interest rate? Step 1: Express your tax bracket as a decimal: 24% = 0.24
Step 2: Subtract that number from the whole number one: 1 – 0.24 = 0.76
Step 3: Multiply that number by your interest rate: 5% x 0.76 = 3.8%
In this example, a 5% mortgage costs 3.8% after-taxfor someone in a 24% tax bracket.
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PLEASE NOTE: THIS ARTICLE AND OVERVIEW IS PROVIDED FOR INFORMATIONAL PURPOSES ONLY AND DOES NOT CONSTITUTE LEGAL, TAX, OR FINANCIAL ADVICE. PLEASE CONSULT WITH A QUALIFIED TAX ADVISOR FOR SPECIFIC ADVICE PERTAINING TO YOUR SITUATION. FOR MORE INFORMATION ON ANY OF THESE ITEMS, PLEASE REFERENCE IRS PUBLICATION 936. Also, this article is not an offer or commitment to lend you money, and it is not an advertisement for a specific mortgage or a specific interest rate. Payment examples don’t include property taxes and home insurance.
Over the next five years, home prices are expected to appreciate, on average, by 3.6% per year and to grow by 18.2% cumulatively, according to Pulsenomics’ most recent Home Price Expectation Survey.
So, what does this mean for homeowners and their equity position?
As an example, let’s assume a young couple purchased and closed on a $250,000 home this January. If we only look at the projected increase in the price of that home, how much equity will they earn over the next 5 years?
Since the experts predict that home prices will increase by 5.0% in 2018, the young homeowners will have gained $12,500 in equity in just one year.
Over a five-year period, their equity will increase by over $48,000! This figure does not even take into account their monthly principal mortgage payments. In many cases, home equity is one of the largest portions of a family’s overall net worth.
Not only is homeownership something to be proud of, but it also offers you and your family the ability to build equity you can borrow against in the future. If you are ready and willing to buy, find out if you are able to today!
Saving for a down payment is often the biggest hurdle for a first-time homebuyer. Depending on where you live, median income, median rents, and home prices all vary. So, we set out to find out how long it would take to save for a down payment in each state.
Using data from the United States Census Bureau and Zillow, we determined how long it would take, nationwide, for a first-time buyer to save enough money for a down payment on their dream home. There is a long-standing ‘rule’ that a household should not pay more than 28% of their income on their monthly housing expense.
By determining the percentage of income spent renting in each state, and the amount needed for a 10% down payment, we were able to establish how long (in years) it would take for an average resident to save enough money to buy a home of their own.
According to the data, residents in Ohio can save for a down payment the quickest in just under 3 years (2.44). Below is a map that was created using the data for each state:
What if you only needed to save 3%?
What if you were able to take advantage of one of Freddie Mac’s or Fannie Mae’s 3%-down programs? Suddenly, saving for a down payment no longer takes 5 or 10 years, but becomes possible in a year or two in many states as shown on the map below.
Whether you have just started to save for a down payment, or have been saving for years, you may be closer to your dream home than you think! Let’s discuss so I can help you evaluate your ability to buy today.
When it comes to buying a home, whether it is your first time or your fifth, it is always important to know all the facts. With the large number of mortgage programs available that allow buyers to purchase homes with down payments below 20%, you can never have too much information about Private Mortgage Insurance (PMI).
“An insurance policy that protects the lender if you are unable to pay your mortgage. It’s a monthly fee, rolled into your mortgage payment, that is required for all conforming, conventional loans that have down payments less than 20%.
Once you’ve built equity of 20% in your home, you can cancel your PMI and remove that expense from your mortgage payment.”
As the borrower, you pay the monthly premiums for the insurance policy, and the lender is the beneficiary. Freddie Mac goes on to explain that:
“The cost of PMI varies based on your loan-to-value ratio – the amount you owe on your mortgage compared to its value – and credit score, but you can expect to pay between $30 and $70 per month for every $100,000 borrowed.”
According to the National Association of Realtors, the average down payment for all buyers last year was 10%. For first-time buyers, that number dropped to 5%, while repeat buyers put down 14% (no doubt aided by the sale of their homes). This just goes to show that for a large number of buyers last year, PMI did not stop them from buying their dream homes.
Here’s an example of the cost of a mortgage on a $200,000 home with a 5% down payment & PMI, compared to a 20% down payment without PMI:
The larger the down payment you can make, the lower your monthly housing cost will be, but Freddie Mac urges you to remember:
“It’s no doubt an added cost, but it’s enabling you to buy now and begin building equity versus waiting 5 to 10 years to build enough savings for a 20% down payment.”
If you have questions about whether you should buy now or wait until you’ve saved a larger down payment, let’s get together to discuss our market’s conditions and help you make the best decision for you and your family.
Whether you are selling your home, just purchased your first home, or are a homeowner planning to stay put for a while, there is value in knowing which home improvement projects will net you the most “Return On Investment” (ROI).
While big projects like adding a bathroom or a complete remodel of a kitchen are popular ways to increase a home’s value, something as simple as updating landscaping and curb appeal can have a quick impact on a home’s value.
Why are home prices still rising? It is a simple answer. There are more purchasers in the market right now than there are available homes for them to buy. This is an example of the theory of “supply and demand” which is defined as:
“the amount of a commodity, product, or service available and the desire of buyers for it, considered as factors regulating its price.”
When demand exceeds supply, prices go up. This is currently happening in the residential real estate market.
Here are the numbers for supply and demand as compared to last year for the last three months (March numbers are not yet available):
In each of the last three months, demand (buyer traffic) has increased as compared to last year while supply (number of available listings) has decreased. If this situation persists, home values will continue to increase.
The reason home prices are still rising is because there are many purchasers looking to buy, but very few homeowners ready to sell. This imbalance is the reason prices will remain on the uptick.
It’s important to ask these three questions when you invest in real estate:
How can I increase my rate of return? The cornerstone of any smart investment strategy is to calculate your rate of return. With real estate this is done by running the numbers using an internal rate of return (IRR) formula that takes into account:
Present Value (PV) – what am I paying out of pocket to get into this investment?
Term (N) – what’s my timeline and how long am I going to hold this investment?
Periodic Cash Flow (PMT) – what’s my monthly cash flow?
Future Value (FV) – what are my net proceeds (after expenses) when I sell the investment?
How does my rate of return with real estate compare with other investment opportunities? When calculating your rate of return, make sure to account for:
Here are three things to consider when choosing between a 30-year fixed rate mortgage and a 15-year fixed rate mortgage on an investment property:
1 – Cash-Flow Considerations
A 30-year mortgage carries a lower monthly payment and therefore is more likely to result in positive monthly cash flow. The less money you pay out each month, the more likely you are to achieve and maintain positive monthly cash flow. Positive cash-flow reduces your risk of default in case the tenant stops making their rent payments or in case the property goes vacant for a while. For this reason, a 30-yr mortgage is generally less risky for investors vs. a 15-yr mortgage.
2 – Rate of Return Considerations
A 15-yr mortgage saves you money because you pay less interest over time. However, is your goal to save money or make money? If your goal is to make money and improve your rate of return on investment, a 30-yr mortgage may be a better option for you. Although you’d need to run the numbers in each case to determine which option would produce a higher rate of return, you’ll typically find in favor of a 30-yr mortgage. That’s due to the impact of positive leverage on your investment returns.
3 – Investment Objectives
Investing in real estate is not always purely a numbers game. For example, some investors would be happy earning less of an investment return, and experiencing less financial liquidity with a 15-yr mortgage because they value the tangible nature of owning real estate property free and clear. A 15-yr mortgage pays off in half the time, and it would result in higher cash flow and less cash-flow risk in the future when the loan is paid off (assuming you still own the property at that time).
As you can see, there’s no “one-size-fits-all” strategy when it comes to investing in real estate. Contact me for more info or to explore your options!