Is a 30-year or 15-year Mortgage Right for You?

Mortgages are unique like you and I and there is not a "one size fits all."

One of the choices is the loan term: A 30-year mortgage can make your payments more affordable, but a 15-year mortgage may have a lower interest rate. As you're considering your home loan options, here are the most important things to know.

A mortgage is a type of term loan, meaning the amount you borrow is repaid over a set period of time. You make principal and interest payments according to an amortization schedule that's set by the lender. Your monthly payment schedule may also include homeowners insurance and property taxes if those are escrowed into your payment. Private mortgage insurance is also added whenever you buy a home with less than 20% down.

How to Choose a Mortgage Term:

• How long you plan to stay in the home

• The amount you plan to borrow and how much you'll put down

• What size mortgage payment you can reasonably afford

• How a mortgage payment affects your ability to pursue other financial goals

There are several reasons to choose a 15-year over a 30-year mortgage.When you have a 15-year mortgage, the total amount you have to repay is spread out over 15 years, or 180 payments. If you choose a 30-year mortgage instead, you repay the loan over 30 years, or 360 payments.

Pay the home off more quickly with a 15yr mortgage.

The monthly payments will be larger than a 30yr mortgage, allowing more money to go to the principal in a shorter amount of time. Your loan balance decreases faster, which depending upon when you purchased might be important to you if you envision a retirement that doesn't include mortgage debt.

Lower interest rate.

Some lenders see a 15-year term as less risky. That may translate to a lower interest rate compared with a 30-year loan. Depending on the overall interest rate environment, rates for a 15-year mortgage may be a half a percentage point or more lower than 30-year mortgage rates.

Less interest paid over the loan term.

A lower interest rate also benefits you in another way when adding up the total interest paid on the life od the loan. 

Build equity faster.

Home equity represents the difference between what your home is worth and what you owe on the mortgage. When your monthly payment is larger with a 15yr because your loan term is shorter, you can build equity at a quicker pace because you're paying more of the loan principal down each month compared with what you would with a longer mortgage.

What's great about 15-year mortgages versus 30-year mortgages is also what makes them less attractive for certain homebuyers: the larger monthly payment.

In getting your mortgage you need to be concerned with ensuring that the monthly payment is manageable than the total interest paid over the life of the loan.  Paying off your mortgage over a longer period of time can free up cash to do other important things, like investing, saving for college or retirement, and paying for renovations.  And if you have extra money to pay towards principle you can pay down a 30yr mortgage in about 17 years.

Another reason to reconsider a shorter loan term is how long you plan to stay in the home. If you plan to move within the next five years, for example, then being able to build equity faster or get a lower interest rate on the loan may not be as important in deciding which kind of mortgage to get.

A 30-year home loan has its advantages. 

Lower monthly payments.

You don't need to be a math genius to understand that a longer loan term can reduce your monthly payment. That might be attractive if you want to be able to work on other financial goals while you pay down your home loan. If you're getting a larger mortgage, being able to pay over 30 years could make the payments more affordable for your budget.

Payment flexibility.

While you're agreeing to a 30-year mortgage term, you can still choose to make extra payments. That could help you pay the loan off ahead of schedule.

More potential for tax savings.

Interest on home loans is tax-deductible. When you have a 15-year loan, you're paying off more of the interest upfront, so you may not benefit from the tax deduction as long as you would with a 30-year mortgage instead.

There are some drawbacks to choosing a 30-year home loan over a shorter term.

As the earlier example showed, the biggest drawback is interest. Not only can you end up with a higher interest rate on a 30-year mortgage, but you'll also pay more total interest on the loan. That assumes, of course, that you stick with the same loan term and don't refinance to a shorter mortgage at any point.

Refinancing from a 30-year loan to a 15-year loan could save you money if you're able to get a lower interest rate. Whether refinancing makes sense depends largely on the difference between your current interest rate and the rate you'd qualify for, as well as how much you still owe on the mortgage. Keep in mind that refinancing involves costs and possible upfront expenses since you have to pay closing costs. You could roll those into your loan, but that could make your monthly payments higher.

The best way to evaluate whether a 15- or 30-year mortgage is better is to consider your short and long term goals. 

Specifically, think about:

Timing is particularly important because of how mortgage payments are structured.

In the first 10 years of the mortgage, over two-thirds of your monthly payment is comprised of interest, so if you don't plan on living in your home for more than 10 years, you'll end up paying a lot of interest but only paying down very little of the original principal.

Thinking big picture, in terms of your larger financial goals, can help you decide which loan option is a better fit for your situation.

If the goal is to build quick equity and pay off the loan sooner, then a 15-year plan is a good one.  If you are buying a home long term and has no intent on using equity, perhaps a 30-year loan would be more appropriate, especially if you can't afford the higher monthly payment.

When in doubt, meet with your local mortgage expert and talk about your goals.  Then have your mortgage expert run the numbers for both the 15- and 30-year terms. This can put the short- and long-term financial implications in perspective so you can make an informed decision. 

Can you buy a new home if you haven’t sold your current home?

You are relocating for a job and you have to find a new place for your family.  Possibly your spouse and kids can go ahead of you.  You found the home of your dreams and don’t want it to be sold out from under you before you’ve sold your current home. 

These are all common scenarios homeowners face when they are looking to buy a new home while still carrying a mortgage on their current residence.  Yes, it is possible to qualify for financing while you are still paying your current mortgage.  If you qualify for both mortgages we can help you can do a Recast so you can buy that home before it's gone.  Or you can even put a “contingent” offer in on a new home, meaning the purchase is “contingent” upon the sale of your current home.

You do have other options.

Buy-Low, Sell-High – the housing market is seasonal.  When you buy your new home in the off season (fall and winter) and sell you current property when the market is busy (spring and summer) you have the opportunity to save on costs.  If you are financially capable of carrying two mortgages for three-to-six months this is a great alternative.

Rent Back – if you get an offer on your current home before you settle on your new home, sometimes you have the opportunity to “rent-back.”  In this arrangement, the seller can continue living in their current residence and pay the new owner a monthly rent equivalent to the new mortgage payment. 

HELOC – in this scenario, you can use your existing home as collateral to take out a “home equity line of credit” to use as the down payment on your new home.  Once you sell your current home, you can pay off the mortgage and the equity loan.  This option works best in a fast-appreciating market and can be a little risky, since it takes a few weeks to get the typical equity loan. 

Recast – With a recast you must be able to put a small down payment and qualify for both mortgages.  It's also best if your current home is listed and in an active contract with a buyer. The way the recast works is after you sell your current home, you take the proceeds and pay it down towards the mortgage you just took out and the lender re-amortizes the loan.  The rate and terms remain the same and you do not incur the cost of refinancing. 

In real life, buying and selling schedules may not always coincide.  These are some options if you need to carry both mortgages simultaneously.  If you have any questions about your specific situation, please let me know!

Why is my credit score different than credit karma?

Credit Karma is a for-profit business that uses only two of the big three credit bureaus and your score might not be entirely accurate. It is offering you something for free, but it is making money elsewhere.

Second, Credit Karma only updates its scores once per week. For most people once per week is plenty, but if you’re planning to apply for credit in the near future, you may need a more timely picture of where you stand.

Third, some sites have reported that the Credit Karma score is within 1% of your FICO score. Credit Karma uses the Vantage 3.0 scoring model.  Credit scores come from different scoring models, including FICO and Vantage 3.0. More than 90% of lenders prefer the FICO scoring model, but Credit Karma uses the Vantage 3.0 scoring model.

FICO is the most popular credit score used by lenders and creditors and the Vantage 3.0 does not use the same algorithm and can give the viewer a misconception that their score.

Fourth, the Vantage 3.0 score is accurate, it’s just not the industry standard. Credit Karma works fine for the average consumer, but the companies that will approve or deny your application are likely looking at your FICO score.

Finally, understand that Credit Karma’s business model is to earn commissions off loan products you purchase through its site. Although the site positions itself as a trusted adviser, its motivation is to sign you up for new loans. Overuse of credit can have financially catastrophic results. Use Credit Karma to monitor your score – not to received unbiased advice.

Millions of people use Credit Karma to track their credit score and it is a good tool to monitor your credit score on a regular basis. Stay proactive and monitor your credit regularly so you can catch inaccuracies or fraudulent information. Make sure you dispute these inaccuracies before applying for credit. Not only does it show you your credit scores for free, but it also gives you suggestions to improve them.

However, if you’re gearing up to apply for a loan or mortgage seek additional information. Track down your FICO scores and monitor them alongside your Vantage 3.0 score. That way you’ll have the fullest picture of your financial profile.

Getting compensation from the Equifax data breach

Equifax announced that their data was breached from mid-May through July 2017. The breach was discovered on July 29. It is estimated that 145 million consumers were affected. The credit reporting company this week agreed to pay $700 million for claims tied to the hack, which occurred after Equifax botched a software update, and up to $425 million of the total can be claimed directly by consumers. Not sure if your information was exposed? Use this website to see if you’re eligible: https://eligibility.equifaxbreachsettlement.com/en/eligibility

Terms of the settlement:

Free Credit Monitoring and Identity Theft Protection Services Up to 10 years of free credit monitoring OR $125 if you decide not to  enroll because you already have credit monitoring. The free credit monitoring includes: At least four years of free monitoring of your credit report at all three credit bureaus (Equifax, Experian, and TransUnion) and $1,000,000 of identity  theft insurance. Up to six more years of free monitoring of your Equifax credit report. If you were a minor in May 2017, you are eligible for a total of 18 years of free credit monitoring. Cash Payments (capped at $20,000 per person) For expenses you paid as a result of the breach, like: Losses from unauthorized charges to your accounts The cost of freezing or unfreezing your credit report The cost of credit monitoring Fees you paid to professionals like an accountant or attorney Other expenses like notary fees, document shipping fees and postage, mileage, and phone charges For the time you spent dealing with the breach. You can be compensated $25 per hour up to 20 hours. If you submit a claim for 10 hours or less, you must describe the actions you took and the time you spent doing those things. If you claim more than 10 hours, you must describe the actions you took AND provide documents that show identity theft, fraud, or other misuse of your information. For the cost of Equifax credit monitoring and related services you had between September 7, 2016, and September 7, 2017, capped at 25 p ercent of the total amount you paid. Even if you do not file a claim, you can get: Free Credit Reports for All U.S. Consumers Starting in 2020, all U.S. consumers can get 6 free credit reports per year for 7 years from the Equifax website. That’s in addition to the one free Equifax report (plus your Experian and TransUnion reports) you can get at AnnualCreditReport.com. Sign up for email updates to get a reminder in early 2020. More information can be found here: https://www.ftc.gov/enforcement/cases-proceedings/refunds/equifax-data-breach-settlement Make sure to check on your credit profile and stay protected!

5 Biggest Student Loan Myths to STOP Believing

Student loan debt is one of the biggest barriers to homeownership for millennials.  Despite the ability to afford a monthly mortgage payment, many first-time home buyers are unable to buy a home because of their inability to save for a down payment due to student debt repayment. 

Responsible student loan debt management is the first step toward being able to purchase a home.  One of the first steps toward responsible student loan debt management is to stop believing these student loan myths.

1. You’re stuck with your interest rate.

You have the opportunity to secure a lower interest rate with student loan refinancing. If you have built a good credit score, typically 680 or higher, and are in good standing with your loan repayment you can apply for a student loan refinance with the same or another lender.  Underwriting criteria will vary based on the lender who issues your student loan refinance.  If you do not qualify for a student loan refinance on your own, a qualified co-signer could help you qualify.

2. Everyone is eligible for student loan forgiveness.

The “Obama Student Loan Forgiveness” program, unfortunately, does NOT exist.  However, there is a Public Service Loan Forgiveness Program for eligible federal student loans, but not private student loans.  According to Forbes, some of the qualifications for Public Service Student Loan Forgiveness includes “student borrowers who are employed full-time in an eligible federal, state, or local public service job or 501(c)(3) non-profit who have made 120 eligible on-time payments over 10 years and are enrolled in a federal repayment program.”

3. Applying to multiple lenders for refinance will lower your credit score.

Just like when you are shopping for a car, “interest rate shopping” inquiries made during a short period of time, within 30 days for example, will have little to no impact on your credit score.  In fact, applying to multiple student loan lenders for a refinance can actually improve your chances for approval.  Shop around within a specific time frame to find the best interest rate for your student loan refinance.

4. There is an early payoff penalty.

While some loans have a penalty for paying off early, your student loans do not.  In some cases, extra student loan payments can help you save on costly interest.  Before making any extra payments toward your student loans it is best to run the numbers or consult a financial advisor to see which payoffs would benefit you the most. 

5. Federal student loan consolidation will lower your interest rate.

One of the most common student loan myths, is that federal student loan consolidation will lower your interest rate.  When federal student loans are consolidated, the interest rate is equal to a weighted average of each loan’s existing interest rate, rounded up to the nearest 1/8%.  So, this interest rate may be lower than the interest rates on some existing loans, but it will be higher than others because it is an average.  If you are seeking a lower interest rate, you should consider a student loan refinance instead. 

Although student loan debt is one of the biggest barriers to homeownership, responsible repayment and management is one way to better position yourself for homeownership.  If you have any questions about how your student debt will impact your ability to own a home, give us a call.

Aundrea Beach-Greco
NMLS 333739
info@aundreabeach.com
www.AundreaBeach.com

Sources: Forbes

How much can a seller pay towards closing costs when buying a home?

Mortgage closing costs range from 2-5% of a home’s purchase price and that can add up quickly. But, many sellers are willing to pay for some of your closing costs in order to sell their home faster.

There is a limit however to how much a seller can pay for. Depending upon your loan, each loan type — conventional, FHA, VA, and USDA — sets maximums on the seller-paid contributions.

Seller-paid costs are also known as sales concessions, seller credits, or seller contributions. Whatever you want to call them, new and experienced homebuyers can get help on costs with help from the seller.

Seller contributions by loan type

Each loan type has slightly different rules when it comes to seller contributions. The percentage each loan type allows varies as well. It’s important to understand the seller-paid maximums for your loan type, so you can take full advantage when it comes time to buy.

Maximum seller-paid costs for conventional loans

Fannie Mae and Freddie Mac are the two rule makers for conventional loans. They set maximum seller-paid closing costs that are different from other loan types such as FHA and VA. While seller-paid cost amounts are capped, the limits are very generous.

A homebuyer purchasing a $250,000 house with 10% down could receive up to $15,000 in closing cost assistance (6% of the sales price). This dollar figure is a lot more than the typical seller is willing to contribute, so the limits won’t even be a factor in most cases.

FHA seller contributions

For all FHA loans, the seller and other interested parties can contribute up to 6% of the sales price or toward closing costs, prepaid expenses, discount points, and other financing concessions.

If the appraised home value is less than the purchase price, the seller may still contribute 6% of the value. FHA indictors that the lessor of the two (purchase versus appraised) values may be used.

VA loan seller contribution maximum

The seller may contribute up to 4% of the sale price, plus reasonable and customary loan costs on VA home loans. Total contributions may exceed 4% because standard closing costs do not count toward the total.

According to VA guidelines, the 4% rule only applies to items such as:

• Prepayment of property taxes and insurance
• Appliances and other gifts from the builder
• Discount points above 2% of the loan amount
• Payoff of the buyer’s judgments and debts
• Payment of the VA funding fee

For example, a buyer’s core closing costs for things like appraisal, loan origination, and the title equal 2% of the purchase price. The seller agrees to prepay taxes, insurance, the VA funding fee, and a credit card balance equal to 3% of the sales price.

This 5% contribution would be allowed because 2% is going toward the core loan closing costs.

USDA seller contributions

USDA loan guidelines state that the seller may contribute up to 6% of the sales price toward the buyer’s reasonable closing costs. Guidelines also state that closing costs can’t exceed those charged by other applicants by the lender for similar transactions such as FHA-insured or VA-guaranteed mortgage loans.

Interested party contributions

Seller-paid costs fall within a broader category of real estate related funds called interested party contributions or IPCs. These costs are contributions that incentivize the homebuyer to buy that particular home. IPCs are allowed up to a certain dollar amount.

Who is considered an interested party? Your real estate agent, the home builder, and of course the home seller. Even funds from down payment assistance programs are considered IPCs if the funds originate from the seller and run through a non-profit.

Anyone who might benefit from the sale of the home is considered an interested party, and their contribution to the buyer is limited.

Why set maximum seller-paid closing costs?

Mortgage rule makers such as Fannie Mae, Freddie Mac, and HUD aim to keep the housing market fair by keeping values and prices sustainable.

Here’s an example of how rampant seller-paid closing costs and other interested party contributions could inflate prices.

Imagine you are buying a home worth $250,000. The seller really wants to sell the home fast, so he offers $25,000 to pay for your closing costs and says you can keep whatever is left over. But, in exchange he changes the home price to $275,000.

He then illegally pays the appraiser to establish a value of $275,000 for the home.

A number of negative consequences arise:

• You paid too much for the home.
• Similar homes in the neighborhood will start selling for $275,000 (and, more if the cycle is repeated).
• The bank’s loan amount is not based on the true value of the home.

In a very short time, property values and loan amounts are at unrealistic levels. If homeowners stop making their payments, banks and mortgage investors are left holding the bill.

Can the seller contribute more than actual closing costs?

No. The seller’s maximum contribution is the lesser of the sales price percentage determined by the loan type or the actual closing costs.

For instance, a homebuyer has $5,000 in closing costs and the maximum seller contribution amount is $10,000. The maximum the seller can contribute is $5,000 even though the limits are higher.

Seller contributions may not be used to help the buyer with the down payment, to reduce the borrower’s loan principal, or otherwise be kicked back to the buyer above the actual closing cost amount.

Creative ways to use excess seller contributions

While seller contributions are limited to actual closing costs, you can constructively increase your closing costs to use up all available funds.

Imagine the seller is willing to contribute $7,000, but your closing costs are only $5,000. That’s a whopping $2,000 is on the line.

In this situation, ask your lender to quote you specific costs to lower the rate. You could end up shaving 0.125%-0.25% off your rate using the excess seller contribution.

You can also use seller credits to prepay your homeowners insurance, taxes, and sometimes even HOA dues. Ask your lender and escrow agent if there are any sewer capacity charges and/or other transfer taxes or fees that you could pay for in advance. Chances are there is a way to use all the money available to you.

You can even use seller credit to pay upfront funding fees for government loan types like FHA.

Use seller contributions for upfront FHA, VA, and USDA fees

All government-backed loan types allow you to prepay funding fees with seller contributions.

FHA loans require an upfront mortgage insurance payment equal to 1.75% of the loan amount. The seller may pay this fee. However, the entire fee must be paid by the seller. If you use excess seller credit, but it’s not enough to cover the entire upfront fee, then you cannot use the funds toward the fee.

VA loans allow the seller to pay all or part of the upfront fee (2.15%-3.3% of the loan amount). The fee counts towards VA’s 4% maximum contribution rule.

USDA requires an upfront guarantee fee of 2.0% of the loan amount. The buyer can use seller contributions to pay for it.

Seller contributions help many become owners

Seller contributions and other interested party credits reduce the amount of money it takes to get into a home.

Zero-down loans such as USDA and VA require nothing down. But, opening any loan involves thousands in closing costs.

A seller credit can remove the closing cost barrier and help buyers get into homes for little or nothing out-of-pocket.

Many home shoppers are surprised that they not only qualify, but that initial homeownership costs are much lower than they expected.

How Divorce Affects Getting a Home Loan

Those who find themselves having to make a fresh start in the wake of a separation or divorce are confronted with many uncertainties and decisions. There are 3 important things we cover in this video - refinancing, quit claims and child support/alimony. An experienced mortgage professional can help divorced individuals take advantage of home finance opportunities.

Check out this quick video

https://youtu.be/tjLY1JiUE4Q
Questions? Call or text 702.326.7866 www.AundreaBeach.com Share your favorite part of this video with us in the comments section below. PS- If you want help finding one of the best mortgage advisors in the nation, a Certified Mortgage Planning Specialist (CMPS), please let me know. I'm here to help! Want to know more about Las Vegas real estate, mortgages or about buying a house in Las Vegas? Send me a message, I'm here to help! Have an amazing day! -Your Trusted Local Mortgage Expert, Aundrea Beach-Greco Contact info: AUNDREA BEACH-GRECO Mortgage Advisor, CMPS NMLS 333739 Call/Text: 702-326-7866 Email: info@aundreabeach.com CMG Financial 8337 W. Sunset Rd, Suite 300 Las Vegas, NV 89113 Designations- Certified Mortgage Planning Specialist (CMPS) Find me online: www.AundreaBeach.com Twitter: https://www.twitter.com/AundreaBeachLV Instagram: http://www.instagram.com/AundreaBeach... Facebook: http://www.facebook.com/Aundrea.Beach...

How Do I Recast My Home Loan [HELOC Alternative]

Putting your mortgage into a trust

You may, or may not, have a trust in place. If not, I strongly suggest you consider the benefits of a living trust and move title into the name of a trust when/if you have one in place. 

What is a living trust and how is it different from a last will.

A living trust (sometimes called an "inter vivos" or "revocable" trust) is a written legal document through which your assets are placed into a trust for your benefit during your lifetime and then transferred to designated beneficiaries at your death by your chosen representative, called a "successor trustee."

On the other hand, a will is a written legal document with a plan of distribution of your assets upon your death. Your executor, as named in the will, oversees this process, and notably, nothing in your will takes effect until after you die. 

1. A Living Trust Avoids Probate
One of the first benefits of a living trust is that it avoids probate. With a valid will, your estate will go through probate, the court proceedings through which your assets are distributed according to your wishes by the executor. A living trust, on the other hand, does not go through probate, which often means a faster distribution of assets to your heirs—from months or years with a will down to weeks with a living trust. Your successor trustee will pay your debts and distribute your assets according to your instructions. Notably, both documents allow you to choose a guardian for your children in the event of your death. 

2. A Living Trust May Save You Money
Remember this really all depends on your financial situation. At first, drafting a living trust will likely cost more than drafting a will as it is a more complex legal document. Moreover, you must also transfer your assets such as bank accounts, stocks, and bond accounts and certificates to the trust through separate paperwork; simply writing up a living trust does not actually "fund the trust." 

Other procedures involved in an estate plan with a living trust could also include changing the beneficiary on your life insurance policy to the trust, appropriately dealing with your IRA or 401(k) plan, and also creating a "pour-over will" that will provide for the distribution of any assets acquired after the creation of the living trust but before your death or any assets inadvertently excluded. 

Note that the pour-over will, just like any will, will have to go through probate.
While a will costs less to draft, a living trust can save your estate money at the time of your death as the distribution of assets in the trust will not go through probate; court costs for probating your will are taken from estate, although note that for a simple, uncontested will, costs are often nominal. 

Regarding contests, living trusts will likely hold up better in the event that someone comes forward contesting the distribution of your assets; accordingly, court costs to cover any will contests may also need to be considered.

As far as savings of income and estate taxes, there is often no substantial difference between living trusts and wills, although living trusts may provide savings for married couples in the form of joint living trusts.
Note that for people with simple estate plans and for young married couples with no children or significant assets, a living trust is probably not financially beneficial. 

3. A Living Trust Provides Privacy 
One big difference between the two legal documents is the level of privacy offered with a living trust. As a living trust is not made public, upon your death, your estate will be distributed in private. A will, on the other hand, is public record and so all transactions will be public as well. 

Another difference is the handling of out-of-state property you own upon your death. With a will, that property will have to go through probate in its own state; a living trust can help you avoid probate. 

What other benefits does a living trust provide?
Beyond the top three main benefits, another benefit is that a living trust is written so that your trustee can automatically jump into the driver's seat if you become ill or incapacitated. 

On the other hand, if you simply have a will without a durable power of attorney, the court will appoint someone to oversee your financial affairs who will have to report to the court for approval of expenses, sales of property, etc. One widely reported public example of this is the conservatorship of Britney Spears' father over his daughter's financial affairs. 

Note that if you draw up a durable power of attorney, including one for health care decisions, you can avoid a court-appointed conservator for your affairs. 

With a living trust, however, your handpicked successor trustee can manage your affairs without court intervention, and since the trust is revocable, if you dispute your incapacity, you can retain control yourself. 

While a living trust makes sense for some people, wills are just fine for others. A general rule among tax planners is that the larger the value of the estate, the greater need there is for a living trust—although even this is not foolproof. 

Are you interested in setting up a living trust, but not sure where to start, or who to go to? I would be more than happy to refer you to a trust attorney. Please call/text/email me if you have any questions.

Aundrea Beach-Greco  NMLS# 333739 Mortgage Advisor, CMPS | CMG Financial  Mobile: (702) 326-7866  Branch NMLS# 929754 8337 West Sunset Road, Suite 300 | Las Vegas, NV 89113

CA HOMEOWNERS: How the insolvency & non-recourse exceptions work for forgiven mortgage debt (Updated 2019)

WHAT CALIFORNIA HOMEOWNERS NEED TO KNOW ABOUT FORGIVEN MORTGAGE DEBT

The tax break for forgiven mortgage debt expired January 1, 2017, for most homeowners across the United States. This means that you may be required to pay income taxes on any debt that's forgiven you this year. For example, if the lender forgives you $50,000 in debt, and your income tax bracket is 25%, you may owe the IRS $12,500! 

However, there are two exceptions to this: 

Exception #1: 
"Insolvency" There's no tax on the forgiveness of debt if you are "insolvent" at the time of debt cancellation. Insolvent simply means that your total debts are greater than your total assets. 

In our example, assume your total assets are $20,000 and your total liabilities are $70,000. This means that your net worth would be negative $50,000. This would make you "insolvent" according to the IRS, and you wouldn't have to pay any taxes at all on the $50,000 in forgiven mortgage debt! 

Keep in mind that when you calculate your assets, you need to include everything you own, including exempt assets beyond the reach of creditors under the law, such as interest in a pension plan and the value of your retirement account. 

Exception #2: 
"Non-Recourse" If you live in California, we have what's known as an "anti-deficiency statute". This means that a mortgage lender is not allowed to pursue you for the difference between the sales price and what owe on the loan. 

Using the example above, assume the lender allows you to do a short sale, but you still owe an extra $50,000. The $50,000 may be considered "non-recourse". 

This means that the lender cannot require you to pay that extra $50,000 in the event of a short sale or foreclosure. In most cases, the loan must have been used to buy, build or improve your primary residence in order to qualify for this special "non-recourse" status. This means that forgiven mortgage debt on your vacation home or investment property may not qualify. You may need to pay income taxes if that debt is forgiven you. You may also have to pay taxes if the forgiven mortgage debt was a cash-out refinance on your primary residence, and you didn't use the funds from the mortgage for home improvements. 

PLEASE NOTE: THIS LETTER 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 4681. 

Source: CMPS Institute 

How the insolvency exception works for forgiven mortgage debt (Updated 2019)

WHAT YOU NEED TO KNOW ABOUT FORGIVEN MORTGAGE DEBT
The tax break for forgiven mortgage debt expired January 1, 2017. This means that you will be required to pay income taxes on any mortgage debt that's forgiven you. For example, if the lender forgives you $50,000 in debt, and your income tax bracket is 25%, you would owe the IRS $12,500!

THE "INSOLVENCY" EXCEPTION 
Here's an interesting twist: there's no tax on the forgiveness of debt if you are "insolvent" at the time of debt cancellation. Insolvent simply means that your total debts are greater than your total assets. In our example, assume your total assets are $20,000 and your total liabilities are $70,000. This means that your net worth would be negative $50,000. This would make you "insolvent" according to the IRS, and you wouldn't have to pay any taxes at all on the $50,000 in forgiven mortgage debt! Keep in mind that when you calculate your assets, you need to include everything you own, including exempt assets beyond the reach of creditors under the law, such as interest in a pension plan and the value of your retirement account. 

PLEASE NOTE: THIS LETTER 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 4681. Source: CMPS Institute

WHEN IS MORTGAGE INTEREST TAX DEDUCTIBLE? (Updated for 2019)

Contrary to popular belief, mortgage interest is not always tax deductible. 

Here's the inside scoop for 2019: 

1. DO YOU ITEMIZE YOUR TAX DEDUCTIONS? 
You cannot take the mortgage interest deduction if you are taking the standard deduction. In 2019, the standard deduction is $12,200 for single taxpayers, $18,350 for heads of household, and $24,400 for married taxpayers filing a joint return. Please see a CPA for details. 

2. IS YOUR HOME A "QUALIFIED RESIDENCE"? 
Mortgage interest is only deductible if the mortgage is attached to a "qualified residence". Taxpayers can generally deduct the mortgage interest on two qualified homes: One Primary Residence; and, One Vacation Home 

3. IS YOUR MORTGAGE CLASSIFIED AS "ACQUISITION INDEBTEDNESS"? 
Your mortgage or home equity line of credit is considered "acquisition indebtedness" if it was used to buy, build or improve a qualified residence. Generally, you can deduct the interest on mortgage balances up to $750,000 of Acquisition Indebtedness. 

Here are two examples: 

A) Jane buys her $500,000 primary residence using a $400,000 mortgage. Jane would be able to deduct the interest on the $400,000 mortgage as acquisition indebtedness because (1) the mortgage was to buy a qualified residence; and, (2) the mortgage falls within the $750,000 limit. 

B) Janice buys her $500,000 primary residence with cash. A year later, Janice does a cash-out refinance and puts a $400,000 mortgage on the home. The funds are not used for home improvements. Janice would NOT be able to deduct the interest on the new $400,000 mortgage because the funds were not used to buy, build or improve the house. 

THREE PITFALLS TO AVOID 
As you can see, it's very important to structure your mortgage in a way where it can be classified as "acquisition indebtedness"! Here are three common mistakes that many people make when choosing a mortgage strategy and deducting their mortgage interest: Pulling cash out of a primary residence to buy a vacation home, and then illegally deducting the interest on that cash-out mortgage (in these cases, it's often better to place a mortgage on the vacation home itself so that it can be classified as "acquisition indebtedness") Paying cash for a home, taking out a mortgage later on, and then illegally deducting the interest on that cash-out mortgage Illegally deducting the interest on mortgage balances that do not qualify as acquisition indebtedness 

DISTINCTION BETWEEN A QUALIFIED RESIDENCE AND AN INVESTMENT PROPERTY 
Everything mentioned above pertains to a mortgage transaction involving a primary home or vacation home that is elected as a “qualified residence” for tax purposes. If your transaction involved an investment property, see IRS Publication 527.

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.

Aundrea Beach-Greco 
Mortgage Advisor, CMPS 
NMLS: 333739 
CMG Financial 
info@aundreabeach.com 
(702) 326-7866 
8337 W. Sunset Road, Suite 300, Las Vegas, Nevada 89113 
Corporate NMLS: 1820

Illustrates the rules surrounding acquisition indebtedness - last updated 01-2019