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1-26-18: The tenant is still in the property, should we close

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Question of the week: The tenant is still in the property, should we close?

 

Answer:  With real estate values up many investors are selling properties they have been holding onto and renting for several years. As a result we have some issues pop-up on home sale transactions that do not present themselves when sellers are owner-occupants.

 

Over the weekend I got a call from clients who had just finished their final walk-through on a condo unit they were purchasing for mom and we were scheduled to fund and close on Monday.

 

The sellers had retained the condo as a rental years ago when they had purchased a new home. As part of the sales contract the seller agreed to have the property vacated by the tenant at least 10 days before closing. The buyers were calling because the tenant, and a fair amount of his possessions, was still in the property.

 

“What should we do?”

 

Don’t close.

 

I let them know that as soon as we concluded the call I would be notifying my office, the escrow officer and agents that because the tenant and his possessions were still in the property that we would not be funding on Monday unless the buyers contacted me to let me know the property was vacant.

 

Why?

 

Once you take ownership of the property the tenant becomes your tenant. And your problem. If the tenant decides to stay a while longer, or does not remove his possessions, you as a landlord are very restricted as to actions you may take due to tenant’s rights in the State of California. To remove the tenant you would have to go through the formal eviction process, which includes many filings and trips to court and if necessary engaging the county sheriff’s office to force eviction. Should the tenant fight the eviction and employ many of the legal delays available it can take up to a year to evict the tenant. I will not delve into the possible condition of the property once the tenant does vacate, voluntarily or involuntarily.

 

My advice to the client was to not proceed with funding the loan and closing the property until they made inspection to show that the tenant was no longer in the property or any of his possessions. Once that was confirmed they needed to change the locks as well as the code on the garage door opener to prevent his being able to re-enter the property.

 

On Monday morning the client called and said the tenant was out but some possessions were on the other side of a shared garage. Since the garage was shared with another unit, and that unit is vacant, my advice was to not close until those possessions were removed as it could still be construed as possession was with the tenant.

 

That evening the buyer called and let me know that the seller had removed the possessions, changed the locks and re-coded the garage door opener.

 

We funded the loan and closed on Tuesday on a vacant property that became full possession of the new owners.

 

Over the years I have been involved in a few nightmare scenarios involving our clients purchasing properties they intend to occupy with tenants still in residence because they closed with the tenants in possession. In every instance the buyers took the word of the seller, the tenant or the agent(s) that the tenant would be out of the property by closing. In one transaction the tenant left a few days after closing, but not before taking the appliances that were included in the sale. In another the tenant was still in the property one month after close and a pay-off was negotiated whereby the new owner gave the tenant a few thousand dollars to leave, giving him a cashier’s check in the street once the property was verified to be empty; the locksmith was there as well changing the locks while the transaction took place.

 

These are not the normal experiences of purchasing a home that has been used as a rental, however they do occur. If you are purchasing a home, or property, and you want it vacant at the time of closing, do not close until you verify it is vacant. No excuses, no promises, you want the property vacant when you take possession and once you do change all the locks and codes to enter the property.

 

If anyone wants an idea of the rights of tenants in California I suggest getting “Pacific Heights” from Netflix or Amazon. A bit extreme but…..

 

Have a question? Ask me!

 

Gross Domestic Product data for the 4th quarter of 2017 were released today and the report is positive once you dig into the data. Overall the economy grew at 2.6%, below the expectations of 3% or greater growth, and lower than the 3.2% growth in the 3rd quarter. Diving into the numbers GDP growth was restrained due to net exports which showed a $652 billion deficit (America imported $652 billion more in goods than it exported). This trade deficit pulled back what would have been a very strong GDP reading mostly due to the strongest quarter of consumer spending since 2015, up 3.8% from the prior quarter. With consumer spending being approximately 65-70% of our economy strong spending by consumers drives a strong economy. Another positive in the report was 2.4% increase in prices, also indicating economic strength. Just the headline number has a neutral impact on mortgage rates, digging into the numbers showing the strength of consumer activity is negative on mortgage rates and puts upward pressure on them in the short and long term.

 

Rates for Friday January 26, 2018: Rates bump up this week, and the conforming rate hits 4% for the first time since the last week of March 2017. With positive economic news we can expect more upward pressure on rates. If you are waiting for rates to dip back down you may have missed the opportunity. Lock your rate when you can!

 

FIXED RATE MORTGAGES AT COST OF 1.25 POINTS LOCKED FOR 45 DAYS:

30 year conforming                                            4.00%       Up 0.125

30 year high-balance conforming                       4.25%        Up 0.125%

 

Please note that these are base rates and adjustments may be added for condominiums, refinances, credit scores, loan to value, no impound account and period rate is locked. Rates are based on 20% down with 740 FICO score for purchase mortgages.

Throwback night for Leslie and I as we take the girls to the Honda Center for the Totally ‘80’s concert featuring many bands we listened to, well in the ‘80’s. Everyone is excited for the show and last night there was some impromptu warbling of some of the songs we may hear.

 

You know you are getting old when the songs you listened to after college, well after, are being played on the “Oldies” stations!

 

Have a great week,

 

Dennis

 

 

 

 

1-19-18: What are supplemental taxes

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Question of the week: What are supplemental taxes?

 

Answer:  This is a question many buyers ask, whether first time buyers or someone purchasing for the first time in a long time.

 

Before we talk about supplemental property taxes we need to review property taxes. To keep this discussion simple, we are only addressing taxes when a home is purchased.

 

Your property taxes are established when you purchase your home and are based upon the purchase price. The base tax rate in California is 1% of the purchase price. On top of the 1% are additional assessments as established by the voters or elected officials in the county and/or city where the property is located. For instance in Long Beach there are additional taxes assessed for water district, the county for parks, school district and community college district among other assessments.

 

The rule of thumb for property taxes is the amount is 1.25% of the purchase price of the property. If you purchase a property for $500,000 we estimate your taxes to be $6250 per year.

 

In California, the fiscal year is July 1st to June 30th. Tax bills are mailed in October with the first half taxes due by December 10th and the second half taxes due by April 10th. With our $500,000 price example, you would need to pay $3,125 in December and $3,125 in April.

 

If you are purchasing a home and close on the last day of February the escrow company make sure the second half taxes, due by April 10th, are paid as part of the closing. The taxes that will be paid will be those currently due; i.e. the current owner’s tax bill. As well the escrow company will collect from you and reimburse the seller for four months of taxes since you will own the property the final four months of the tax year—March, April, May and June.

 

On the property you are purchasing for $500,000 that will have property taxes of $6,250 the current owner’s annual taxes at the time of the sale are $3,850 per year. At closing you will be charged $1283.33 to cover the four months between your purchasing the property and the end of the tax year on June 30th.

 

In October your property tax bill will state that you owe a total of $3,850, half due by December 10th and half by April 10th.

 

But…your tax basis is supposed to be $6250, why is your tax bill smaller? Because if you purchase your property between January and May the prior owner’s property taxes will continue through the next fiscal year.

 

You will also receive a supplemental tax bill in the amount of $2400 with half due by December 10th and half by April 10th. The supplemental taxes cover the difference between the amount you were billed based on the prior owner’s tax obligation and your tax obligation based upon the transfer price.

 

If you are paying your taxes directly this causes little difficulty, you are paying the total amount that is owed, just off of two different bills, the regular tax bill and the supplemental.

 

If you have your taxes impounded as part of your monthly mortgage payment then it gets a little tricky. Your lender will be collecting every month based upon what your taxes should be, $520.83 per month, and will be prepared to pay $3,250 in December and $3,250 in April. However, in October the lender will receive a tax bill totaling $3,850 with two installments due.

 

This is where it can, and does, get tricky and one reason I encourage people to avoid having their taxes and insurance impounded and paid by the lender if it is an option. In this scenario, with an impound account, you will have paid your lender $520.83 per month based on what tax obligation will be, and then your lender will pay the taxes owed on the tax bill. The result will be a balance of the excess between what was collected and what was paid. At some point the lender will refund this money to you, as they must by law.

 

However, the refund will most likely come after you will need to pay your supplemental tax bill totaling $2400. If you are impounded and have paid the full amount to the lender for the taxes why is the lender not paying the supplemental tax bill? They have the money to pay it.

 

Because the county assessor does not send the supplemental tax bill to your lender, and you are responsible for the payment. Essentially you will end up paying the supplemental amount twice, once to the lender—which eventually gets refunded—and once to the county.

 

If you have an impound account there is the possibility that your payments will be adjusted a few times over the following year or more. Because the tax bill sent to the lender was significantly less than the amount collected, the lenders automated billing process may reduce the amount owed every month as part of the tax collection and will send you a notice to this effect.

 

It is very important if you do get this notice that you contact the lender and inform them that you do not want your impound collection to be lowered due to the one-time tax bill that was paid at the prior owner’s tax rate, because if you do then you will be underpaid when the next tax bill is sent and the lender will end up sending you a notice that the account is short and your payment must be increased to account not only for the real tax amount due but the shortage created by them adjusting their collections.

 

Confusing isn’t it? This happens not infrequently as the lender tries to catch up to the actual taxes owed. So if you get a notice after the first tax bills have been paid by the lender, and you have paid your supplemental taxes that significantly lowers your tax collection for your impound account contact your lender immediately and have them adjust the collection back to the necessary amount.

 

As with any mortgage or real estate related question or problem you can contact me if you are having an issue regarding the supplemental taxes or impound account I can help walk you through the process and steps to take.

 

Have a question? Ask me!

 

Rates for Friday January 19, 2018: Not a lot of economic news this week to move rates, however there was movement up on high-balance and upward pressure on conforming due to the gains in the stock markets. As I write this after noon on Friday the bond markets are off (higher rates) due to uncertainty over the potential shutdown of the Federal government. Now is not the time to float your rate, if you are in position to lock in your rate through your closing period I suggest you lock.

 

FIXED RATE MORTGAGES AT COST OF 1.25 POINTS LOCKED FOR 45 DAYS:

30 year conforming                                            3.875%       Flat

30 year high-balance conforming                       4.125%        Up 0.125%

 

Please note that these are base rates and adjustments may be added for condominiums, refinances, credit scores, loan to value, no impound account and period rate is locked. Rates are based on 20% down with 740 FICO score for purchase mortgages.

 

 

I had an interesting childhood moving around (three states and a foreign country through high school), as a result I have what some may consider odd allegiances for sports—basically the Oklahoma Sooners due to my native state and Philadelphia sports as that is where we moved when we left Oklahoma. Being a fan of Philly sports is a history of disappointment most of the time with some seasons of hope.

 

As a result of my allegiances, I have been somewhat excited through December as first the Sooners had the opportunity to play for the national championship in college football and now the Eagles are in position to go to the Super Bowl for the first time since 2005. The Eagles (or Iggles in local parlance) lost that game to Tom Brady and the Patriots who won their second Super Bowl in a row and third in four years. I may be asking for it, but I am hoping not only that the Eagles beat the Vikings this weekend, but they have a chance to upset the Patriots, prevent them from repeating history by winning their second in a row and third in four years.

 

I know all of you are with me on this!

 

Have a great week,

 

Dennis

Fly Eagles Fly

 

 

 

1-5-18: With the new tax laws should I keep my Home Equity Line of Credit

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Question of the week: With the new tax laws should I keep my Home Equity Line of Credit?

 

Answer:  With the calendar turning to 2018 we are now under the new tax codes signed into law by President Trump in December. There is still plenty of confusion about how the IRS will treat many of the changes, among them is the interest paid by home owners if they have a Home Equity Line of Credit (HELOC) and if it is deductible on the federal tax return. Reading through many articles and communicating with tax professionals, lenders that specialize in HELOCs and other research I am not entirely clear on how HELOC interest will be treated moving forward—and until the IRS issues a clear ruling I don’t think anyone else is either.

 

Some people may use the deduction, or lack thereof, to determine how they wish to move forward with their current HELOC, or to obtain one for purposes of home improvement, debt consolidation, college costs, etc. Here are some items to consider if you have, or are considering, a HELOC.

 

DISCLAIMER: I am not a tax professional, if you have a HELOC please consult with your tax preparer regarding the impact it has on your taxes.

 

There is a lot of information out that none of the interest on your HELOC will be deductible, regardless of when you obtained it or how the funds were spent (home improvement, debt consolidation, medical expenses, college, etc). Under this line of reasoning, if you have a $100,000 HELOC you obtained when you purchased the home in 2011, the interest is no longer deductible.

 

However, there are some “experts” that are stating that if your HELOC was used for the acquisition of your primary, or second/vacation home, then the interest paid on the HELOC is still deductible. These are contrary opinions, and if you have a HELOC that you have only used to purchase your home it obviously has an impact on your tax preparation in the future. If acquisition HELOCs will remain deductible then you are fine and continue as you have in the past, if they are not then you will want to meet with your tax and mortgage professionals to determine your best course of action moving forward.

 

If you obtained a HELOC to put in a pool, remodel your home or do other home improvements, in the past you probably had an interest deduction. Under the new law, based on almost everything I have read and heard, you will no longer be able to deduct that interest from your federal taxes.

 

If you have a HELOC that you used for medical expenses, college tuition and/or debt consolidation you will also not be able to deduct the interest moving forward.

 

Back to our question of the week, if you have a HELOC should you keep it? Especially if the interest you pay is no longer deductible?

 

As with most questions involving mortgages and personal finances, there is no standard answer for everyone. The factors you need to consider are:

 

How much is the tax deduction you are losing? If you have a balance of $50,000 and are paying $2500 per year in interest, is losing that deduction costing you a lot of money?

 

What are your options to pay off the HELOC? Do you have cash or assets you can liquidate to pay off the balance? If you do what is your trade off? What has been your return on investment for those assets and what is the rate on your HELOC? Are you making more in interest and/or dividend payments than you are paying for the HELOC?

 

Or perhaps you pay off the HELOC with a refinance of your primary mortgage and consolidate the two loans. Once again, we do the math, what is your current rate on your primary mortgage, what are your payments, what is the value of your home and the total balances we would be consolidating? And finally, and very importantly, what will be your new rate of interest and monthly payment?

 

One big factor to consider if you have a HELOC and are considering paying off or refinancing to consolidate the payment is your future interest rates. Almost every HELOC has its interest rate tied to the prime rate. The prime rate tends to move up and down when the Federal Reserve moves its lending rate up and down. In the past year the Fed has hiked its rates three times, each time 0.25% (one-quarter of one percent), resulting in the prime rate also going up 0.25%  three times for a total of 0.75% (three-quarters of one percent) in the past year. If you had a $100,000 HELOC in December 2016 and retained the same balance through the year your interest payment at the end of 2017 was $62.50 per month ($750 per year) more. The Fed has announced it intends to increase rates three more times in 2018, which will increase the rate on your HELOC another 0.75%.

 

With increases in the prime rate known to be coming in 2018, does it make sense to fix the rate on your HELOC balance and consolidate it with your primary loan?

 

When making a decision regarding your HELOC keep in mind the tax laws started on Monday, and the longer you wait to make that decision the more impact it could have on your tax returns for 2018 that you will file in 2019.

 

When you meet with your tax professional to prepare your 2017 taxes if you have a HELOC ask for advice about your interest deduction options for 2018. And before you meet with your tax professional do not hesitate to give me a call to discuss your options if refinancing and consolidating your HELOC is an option for you.

 

Should you keep your HELOC? Maybe, maybe not, but do your research and explore your options, contact me to discuss some of those options.

 

Have a question? Ask me!

 

The final employment report for 2017 was released this week showing the economy added 148,000 jobs in December and the unemployment rate was steady at 4.1%. The total hires in December were down from November and below expectations of those economists polled. A positive news in the report was a 0.3% increase hourly earnings from December, up 2.5% from December 2016. With inflation running below 2%, average wages increasing more than 2% is positive for workers. Within the report there was strength in construction and manufacturing hires and there are signs that scarcity of skilled labor in these sectors could be hindering growth. Overall the news is mortgage rate neutral.

 

Rates for Friday January 5, 2018: Ending our first week of the new year rates continue the steady pattern of the last few months with no change from last Friday’s rates. Conforming rates start 2018 one-quarter of one percent below (0.25%) what they were the first Friday on 2017.

 

FIXED RATE MORTGAGES AT COST OF 1.25 POINTS LOCKED FOR 45 DAYS:

30 year conforming                                            3.75%           Flat

30 year high-balance conforming                   3.875%        Flat

 

Please note that these are base rates and adjustments may be added for condominiums, refinances, credit scores, loan to value, no impound account and period rate is locked. Rates are based on 20% down with 740 FICO score for purchase mortgages.

 

Today’s WR&MU is being composed from Palm Desert where the Smith family has been compounded for the week. I will admit to feeling no guilt as we have enjoyed very enjoyable weather, getting in a few rounds of golf and spells by the pool, as other parts of the country are digging out of their front doors and wondering which mound of snow in the street is their car. California is not flawless, with perhaps the exception of weather throughout the year and especially weeks like this.

 

I hope everyone had a wonderful New Year’s celebration and wish you all a very healthy and prosperous 2018!

 

Dennis

 

 

 

10-27-17: Should I use a “piggy-back” to buy my new home?

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Question of the week:  Should I use a “piggy-back” to buy my new home?

 

Answer:  We start our answer to the question with a question many of you may be asking, “what is a ‘piggy-back’?”

 

Last week we discussed mortgage insurance and how conventional mortgages require mortgage insurance for loans that are over 80% loan-to-value. If you are buying a home for $600,000 (the median price for a home in LA County) and getting a mortgage for more than $480,000 then you need mortgage insurance.

 

Using a piggy-back enables you to put less than 20% down and avoid mortgage insurance, because the piggy-back is a second loan that bridges the amount between your down payment and your mortgage of 80% of the purchase price.

 

For example, you want to purchase a home for $600,000 but you only have $60,000 down. Traditionally you would get a mortgage for $540,000 and pay mortgage insurance. Using a piggy-back you would put down $60,000 and get a 2nd loan for $60,000 and have your primary loan be $480,000, which is 80% of the purchase price and therefore you do not need mortgage insurance.

 

Not all, but almost all, piggy-back mortgages are Home Equity Lines of Credit (HELOC). What is a HELOC? It is very similar to a credit card, you have a maximum credit limit and you only make payments on the balance you have outstanding. The interest rate on a HELOC is an adjustable tied to the prime rate goes up and down so will the rate on your HELOC.

 

Another feature of many HELOCs is that the minimum payment is interest only, which makes them very enticing as the interest payment can be very low, however you are not paying down any of the outstanding principal which becomes an issue in later years when you have a very large balance that has to be paid off.

 

Since the HELOC is used to purchase the home the interest paid on the loan is tax deductible under the current tax code. This is a positive for many families, especially those who are unable to deduct mortgage insurance premiums.

 

As you can see there are some positive aspects to using a HELOC to purchase your new home, but back to our question of the week: should you use a HELOC to buy your home?

 

Let’s compare getting a HELOC with using mortgage insurance to purchase the median priced home in LA County of $600,000 with 10% down and you have a credit score of 740.

 

Let’s start with purchasing with a HELOC. You will have a primary mortgage of $480,000 (80% of purchase price) and a HELOC of $60,000.  The rate on the primary mortgage this morning is 4.00%, the average rate on a HELOC up to 90% total loan to value (combined 80% primary plus 10% HELOC) is Prime Rate plus 2%, today prime is 4.25% so the rate would be 6.25%.

 

Payment on the primary mortgage is $2292 per month.

The minimum payment on the HELOC is interest only which would be $313 per month*.

 

The minimum payment you must make is $2605 per month, until the prime rate increases and then your payment will increase as well.

 

Last year the prime rate was 3.5%, your rate would have been 5.5% for a minimum payment of $275 per month, if the rate increases another three-quarters of a percent in the next year your rate will increase to 8.00% for a payment of $400 per month.

 

*Most HELOCs are for twenty years, if you want to amortize the payment and include principal the payment at 6.25% would be $439 until the rate changes.

 

If you purchase using mortgage insurance your primary mortgage will be $540,000 at a rate of 3.875%** and your mortgage insurance premium will be 0.41% of the loan amount.

 

Primary mortgage payment is $2539 per month.

Your mortgage insurance premium is $185 per month.

 

Your total payment is $2724 per month as long as you have mortgage insurance, $119 more per month than if you used a HELOC to purchase the home and paid the minimum payment. If you pay additional payments on the HELOC to pay down the principal then you payment purchasing with a HELOC would be higher. As well when the prime rate increases in the future your “savings” with the HELOC will decline.

 

** It seems counter-intuitive that putting 20% down has a higher rate than putting 10%, however rates are lower for mortgages with mortgage insurance than those without as the lenders are insured for losses should you default. If you default on a mortgage that is 80% of the value of the property the lender will lose 10-20% of the loan amount. If you have mortgage insurance on a 90% loan the lender is covered on losses up to 25% of the value of the mortgage. Even though the risk of loss may be higher with 10% down, the amount of loss to the lender should you go to foreclosure is less than if you had mortgage insurance.

 

Note the statement above, “as long as you have mortgage insurance…” Those who read last week’s WR&MU will recall that after you make 24 consecutive payments on time and can show you have 20% equity in the property then you can have your mortgage insurance premium released. So between your mortgage principal declining through your payments and the market increasing you let’s assume you will have that 20% in four years (had you purchased the median priced home in LA County in 2015 you would be able to remove your MI this year) after purchasing your property. At that time you go through the process and have your MI payment removed, saving $185 per month, or $2220 per year.

 

The only way to remove your HELOC payment is to pay it off, and unless you have the ability to make very large payments over the years it will likely take you quite some time to pay off the loan.

 

Depending on your financial situation, and ability to pay down/off the HELOC rather quickly through sale of another property, large bonuses, etc, for most families the long term best option is to purchase their home using mortgage insurance that will have fixed payments, and the ability to remove the MI premium payments in the future, as opposed to a large equity line tied to a rate, the prime rate, that will be going up over the next few years.

 

Please call me to discuss your situation and determine the best way for you to purchase your new home. And if you have a HELOC, or mortgage insurance, from a  previous transaction call me to see what your options are to possibly lower your monthly payments, or keep them the same and fix your total monthly payment.

 

Have a question? Ask me!

 

Remember, with Dennis it’s not just a mortgage, it’s your complete financial picture.

 

Economic data released this week for September shows strength building. Durable goods orders in September showed a nice gain, even trying to account for Hurricane Harvey. Showing even more strength was the initial Gross Domestic Product numbers for the 3rd Quarter, increasing 3.0%, a strong following from the 2nd Quarter’s 3.1% growth. Inside the numbers we saw strong growth in consumer spending and durable goods purchases-led by vehicle replacement post hurricane. The soft spot was residential real estate, which has been supporting economic growth for the past several years. Inflation was at 2.2% annualized with is within the Fed’s target range. Overall the report is fairly rate unfriendly and puts upward pressure on rates for the long term.

 

Rates for Friday October 27, 2017: We see the conforming and high-balance conforming rates un-linked this week. For the first time in almost a year the separation between the two rates is greater than one-eighth of one percent (0.125%) as the high-balance rate increased an eighth of a percent this week and the conforming rate remains flat. The last time we saw the one-quarter percent gap between the two mortgages was the week ending November 11, 2016 when we saw rates increase three-quarters of a percent in six weeks following the election. There is upward pressure on rates, the advice is to lock when you can.

 

FIXED RATE MORTGAGES AT COST OF 1.25 POINTS LOCKED FOR 45 DAYS:

30 year conforming                                            3.75%           Flat

30 year high-balance conforming                   4.00%          Up 0.125%

Please note that these are base rates and adjustments may be added for condominiums, refinances, credit scores, loan to value, no impound account and period rate is locked. Rates are based on 20% down with 740 FICO score for purchase mortgages.

 

 

Well baseball fans are getting a treat, at least two treats so far with the first two games of the World Series, I am hoping we get five more similarly exciting games.

 

I will go out on a limb and presume that many (most? all?) of your households are like ours and the Halloween candy purchased in preparation for Tuesday evening has been thoroughly tested and perhaps the testing has gone so well as to require another purchase of candy for the witches, princesses, firefighter and bumble-bees on Tuesday night. Halloween candy, the official start to the end of the year belt-tolerance limit as we flow from the candy to Thanksgiving to Christmas and the non-stop treats, pies, cakes, etc for the next sixty plus days.

 

Stay strong, say no to yourself and Think Blue,

 

Dennis