Standard or Itemized

Taxpayers can decide each year whether to take the standard deduction or their itemized deductions when filing their personal income tax returns. Roughly, 75% of households with more than $75,000 income and most homeowners itemize their deductions.

Beginning in 2018, the standard deduction, available to all taxpayers, regardless of whether they own a home, is $24,000 for married filing jointly and $12,000 for single taxpayers.

Let's look at an example of a couple purchasing a $300,000 home with 3.5% down at 5% interest. The first year's interest would be $14,630 and property taxes are estimated at 1.5% of sales price would be $4,500.

The interest and property taxes would provide a combined total of $19,130 which is less than the $24,000 standard deduction. Unless this hypothetical couple has other itemized deductions like charitable contributions that would make the total exceed $24,000, they would benefit more from taking the standard deduction.

If the mortgage rate were at 8%, the combined total of taxes and interest would be almost $28,000 which would make itemizing the deductions more beneficial.

Tax professionals will compare available alternatives to find the one that will benefit the taxpayer most. For more information, see www.IRS.gov and consult a tax advisor.

Your Refund Could be the Difference

One of the silver linings to filing your income tax return is finding out that you are going to receive a refund. If you happen to be one of these fortunate taxpayers, your next decision is what to do with it. With the average tax refund around $3,000, it could be the difference that makes a home a reality sooner rather than later.

Many would-be buyers think it takes 10% or more down payment to purchase a home, but actually, it can be much less. There are VA and USDA mortgages that have no down payment for qualified buyers. FHA has a 3.5% down payment program and FNMA has 3% down payment mortgages for qualified creditors.

Closing costs for originating new mortgages can easily range from two to three percent of the purchase price but most lenders will allow the seller to pay part or all of them based on the agreement in the sales contract.

While the average tax refund might not cover the down payment on the median price home, it certainly helps. Your refund could make it as simple as 1-2-3 to get into a home.

1. Get the hard, cold facts for the homes and mortgages in your area and price range.
2. Get pre-approved with a trusted mortgage professional.
3. Start looking at homes.

Call me at (334) 782-3398 or Robin@GetRobinGetSold.com to get started.

Historical Perspective

In 1968, mortgage rates were 8.5%. The next year, rates went down to 7%. Homeowners could buy a 15-20% larger home for the same payments if they could find someone to assume their mortgage.

FHA and VA mortgages were very popular in certain price ranges and they allowed anyone to assume the mortgage regardless of the credit. If you could find a person to take over your note, you were free to qualify for another mortgage.

In October 1981, mortgage rates reached 18.63%. A $250,000 mortgage had a monthly principal and interest payment of $3,896.46. As astronomical as that rate sounds, people were still buying homes and were good investments.

Four years later, they were still over 12%. The monthly payment was $2,571.53. Believe it or not, people were excited to be paying only 2/3 what they had to pay a few years earlier.

Fast forward to late 1991 when the rates went below 9% and that same payment was to $2,015.16. At the turn of the 21st century, rates were 8.15% and that made the payment $1,860.62. Not much change in rates during that decade.

If we look around the housing bubble, late 2008, the rates were 6.04% and the payment was $1,505.31. By 2009, mortgage rates had fallen below 5%. The lowest mortgage rate was 3.31% on November 2012 with a payment of $1,096.27.

Rates fluctuated for the next few years until now, and most of the experts are expecting them to be above 5% by the end of 2018.  Rates have increased each week for the last six weeks to 4.38% with payments of $1,240.12.

The average mortgage rate for the past 47 years is a little over 8%. The real estate and mortgage markets are cyclical. Rates have been historically low for a long period but will probably continue to rise. Most buyers don’t pay cash and mortgages enable them to purchase now. Based on history, even 8% would be an excellent rate. Until it reaches that point again, everything lower is a bargain.

Convincing Advantages with Standard Deduction

The new tax law doubles the standard deduction and it is estimated that over 90% of taxpayers will elect to use it. However, even without considering tax benefits, homeownership has convincing advantages.

Besides the personal and social reasons for owning a home, one of the most compelling is that it is cheaper. Principal reduction and appreciation are powerful dynamics that reduce the effective cost of housing.

Amortized loans apply a specific amount of each payment to the principal amount owed to retire the loan over the term. Some people consider it a forced savings account; when the payment is made, the unpaid balance is reduced.

The price of homes going up over time is appreciation. While there are lots of variables and it is not guaranteed, it is easy to research the history of an area and make predictions based on supply and demand.

Interest rates are still low and can be locked-in for 30 years. Without considering the tax benefits at all, the appreciation and the amortization dramatically affect the “real” cost of owning a home.

Consider a $250,000 that appreciates at 2% a year for the next seven years instead of paying $2,000 a month in rent. In the example, the payment is less than the rent being paid even including the property tax and insurance.

When you factor in the monthly principal reduction and appreciation and consider additional owner expenses like maintenance and possible homeowners association, the net cost of housing is considerably lower than the rent. In this example, reduced cost in the first year alone is more than the down payment required on a FHA loan.

Based on the assumptions stated, the down payment of $8,750 could grow to $73,546 in equity in seven years. Can you name another investment with this kind of potential that also provides you a place to live, enjoy, raise your family and share with your friends?

Use this Rent vs. Own to make projections using your own numbers and price range. We’re available to answer any questions you have and to find out what it will take to own your own home.

Ready for Retirement

It can be shocking to hear how many people spend more time planning their vacation or next mobile phone purchase than planning for retirement. It is hard to imagine that they are expecting Social Security will take them through their golden years. A person who has paid in the maximum each year to social security can assume to receive about $30,000 a year.

Every adult in the work force, should go to SSA.gov to find out what they can expect based on their planned retirement age. Since it probably won’t be the amount you need to retire comfortably, at least you’ll know how much you’ll be short so that you can devise an investment plan.

There’s an easy rule of thumb used to estimate the investable assets needed by the time they retire to generate a certain income. The target annual income is divided by a safe, conservative yield to determine the investable assets needed.

A person who wants $80,000 annual income generated from a 4% investment would need investable assets of $2,000,000. If a person had $500,000 now, they would need to accumulate $1.5 million more by the time they retire. They would need to save about $100,000 a year to be ready for retirement in 15 years.

If saving that amount does seem possible, an IDEAL alternative could be to invest in rental homes. The familiarity of rental homes like owning a personal residence can reduce some of the risk. Rentals also enjoy other characteristics like income from the operation, depreciation in the form of tax shelter, equity buildup from the amortization of the loan, appreciation and leverage from the borrowed funds controlling a larger asset.

Some investors explain the strategy by buying good rentals with mortgages and having the tenant to retire the debt for you. Single family homes offer the investor an opportunity to meet their retirement and financial goals with an investment that is easily understood and controlled.

A Retirement Projection calculator can give you an idea of how many rental homes you’ll need to supplement your social security and other investments.

Homeowner Tax Changes

The new tax law that was signed into effect at the end of 2017 will affect all taxpayers. Homeowners should familiarize themselves with the areas that could affect them which may require some planning to maximize the benefits.

Some of the things that will affect most homeowners are the following:

• Reduces the limit on deductible mortgage debt to $750,000 for loans made after 12/14/17. Existing loans of up to $1 million are grandfathered and are not subject to the new $750,000 cap.
• Homeowners may refinance mortgage debts existing on 12/14/17 up to $1 million and still deduct the interest, so long as the new loan does not exceed the amount of the existing mortgage being refinanced.
• Repeals the deduction for interest on home equity debt through 12/31/25 unless the proceeds are used to substantially improve the residence.
• The standard deduction is now $12,000 for single individuals and $24,000 for joint returns. It is estimated that over 90% of taxpayers will elect to take the standard deduction.
• Property taxes and other state and local taxes are limited to $10,000 as itemized deductions.
• Moving expenses are repealed except for members of the Armed Forces.
• Casualty losses are only allowed provided the loss is attributable to a presidentially-declared disaster.

The capital gains exclusion applying to principal residences remains unchanged. Single taxpayers are entitled to $250,000 and married taxpayers filing jointly up to $500,000 of capital gain for homes that they owned and occupied as principal residences for two out of the previous five years.

Not addressed in the new tax law, the Mortgage Forgiveness Relief Act of 2007 expired on 12/31/16. This temporary law limited exclusion of income for discharged home mortgage debt for principal homeowners who went through foreclosure, short sale or other mortgage forgiveness. Debt forgiven is considered income and even though the taxpayer may not be obligated for the debt, they would have to recognize the forgiven debt as income.

These changes could affect a taxpayers’ position and should be discussed with their tax advisor.

Prevent False Home Security Alarms

Some police departments report as high as 98% of calls are false alarms. Not only is this an incredible waste of police resources that could be available for legitimate emergencies, it annoys neighbors, startles pets and results in expensive false alarm fees.

Know your codes – entering an incorrect keypad code is a common mistake leading to false alarms. The solution is to create codes that are easy for all members of the family to remember without them being obvious to potential burglars like your street number. Let everyone know when you change your code.

Secure windows and doors – be sure that all windows and doors are closed before activating your alarm. Disarm your system before opening a window or door.

House guests – tell visitors that you have an alarm system and when you normally arm it. Housekeepers, baby sitters, outside family and close friends also need to be aware of your procedures and possibly give them a code to disarm the system if it is accidentally activated.

Batteries – most systems have battery backup in case the power goes out. Know how often you need to replace the batteries; some last considerably longer than others.

Motion detectors – pets can trigger a motion detector and then, the alarm. There are sensors made for households with pets providing an alternative to turning them off. Other things that could activate motion detectors are helium balloons or curtains and plant leaves being blown in front of a sensor.

Home alarm systems are valuable to homeowners by increasing security, providing peace of mind and lowering insurance premiums. Some municipalities require a license fee for any home with an alarm. Use your alarm wisely.