Some homeowners are still reluctant to tap the equity in their homes to generate needed cash. They seem to think there’s a negative stigma in drawing cash from their equity the one sure method of forced saving that should not be touched except in dire emergencies.
However, an increasing number of homeowners are using a portion of their growing equity to help them move into a healthier financial situation. They produce cash by refinancing their existing mortgage with a new cash-out loan one with a larger balance than the original mortgage. Or they obtain a home equity loan or line of credit. Support for using equity funds was recently expressed by Alan Greenspan, Federal Reserve Chairman.
Over the past two years, significant increases in the value of real estate assets have, for some households, mitigated stock market losses and supported consumption,he said. He noted that consumer debt has reached a record $2 trillion and personal bankruptcies that have been on a record-setting pace. It has recently grown by another 7.8 percent.
Many people who find themselves in financial problems are discovering an effective bail-out option by tapping their home equity. The factors making this step particularly attractive at this time are the continuing almost historic low mortgage interest rates and sharply rising home values.
Freddie Mac, a major buyer of existing home mortgage loans, reported that $139 billion in cash-out mortgages were closed last year, up from $105 billion during the previous year. As those funds are funneled through our national economy, the positive effect is actually four times greater, or nearly $500 billion, Freddie Mac estimates.
On the other hand, it’s comforting for homeowners to see that equity continue to grow. The benefits of using home equity as a saving vehicle, or even paying off a mortgage, was underlined in a recent study and report by the Consumer Federation of America. Paying off the mortgage on a home has been, and will continue to be, the best and easiest way for households to build personal wealth, said Stephen Brobeck, CFA’s executive director.
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Credit scores more accessible
A few months ago, it was very difficult for a person to learn their credit score. There seemed to be a veil of secrecy and mystery engulfing the scoring system. Today, an increasing number of home mortgage lenders and other firms are eager to provide personal scores to those who request it as a customer service. And some firms accompany the score with suggestions for improving it, thus helping them qualify for a better mortgage loan and terms.
For example, a major San Francisco-based firm Providian Financial Corp. offers customers unlimited access to their credit scores any time they request it, at no charge. They can also sign up for free automatic e-mail alerts any time their scores move by more than 10 points. As an added benefit, that service provides an effective defense against identity-theft credit crimes.
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Rising demand for luxury homes
As baby-boomers mature, the market for luxury homes is becoming more active. The trend is nationwide, but California leads all other states in the sale and financing of these high-priced homes. In fact, this state has six times more luxury home sales than any other state, according to a study by Coldwell Banker Real Estate Corporation.
Luxury home sales in California topped $12.6 billion last year. The highest priced single transaction was a home in Malibu, Calif. It sold for a cool $22.66 million. The national average sales price of luxury homes sold by Coldwell Banker affiliates last year was $1.69 million. Sales of these homes increased by 24 percent over the previous year, according to Coldwell Banker.
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Condos more popular
Condominiums and townhomes are becoming increasingly popular with this year’s homebuyers. Nationally, sales and financing of these units is up by about 10.3 percent over last year at this time, according to a report from the National Association of Realtors. The primary buyers of condos are first-time home buyers and seniors seeking a maintenance-free retirement residence. Thus the trend is particularly prevalent in California where there is an exceptionally large proportion these buyer segments.
Most of my condo buyers in recent months have been first-time home buyers, said John Anderson, a California real estate broker who specializes in condo sales. In many cases, they had been fence-sitting prospective buyers, waiting for an imagined `bubble’ to burst. They finally realized there was no bubble to burst, and took action to purchase and finance a condo.
Another trend noted by Anderson is the increasing number of condo buyers who opt for an interest-only mortgage loan. In a market like this, where an entry-level condo price is about $225,000 some buyers need all the help they can get to afford the monthly payments and qualify for a mortgage, he said.
This is the eighth consecutive annual record for increasing condo sales, NAR reported. The growth of condo sales since 1995 is unprecedented and reflects a new level of demand in the market, said David Lereah, NAR’s chief economist. There is now tremendous momentum that will be driving the condo market through this year.
Lereah credited low mortgage interest rates, an improving economy and growing demand for fueling current and future condo sales. We’ve had low mortgage interest rates for some time, but a strong demographic demand will be a significant factor for years to come. There’s a growing number of households entering the years in which people typically buy a first home. At the same time, many older baby boomers are now trading down to easier-to-maintain properties, Lereah said.
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Financing of manufactured homes
Buyers of manufactured homes will soon have more and better options for financing their purchased unit. Fannie Mae, the nation’s largest buyer of existing home mortgages, announced it will join with nine lenders to purchase 30-year, 5 percent downpayment manufactured home mortgages. The low-cost financing will be available through a network of lenders that have demonstrated high levels of expertise necessary to understand the property, titling, appraisal, and servicing issues associated with manufactured home, according to Fannie Mae.
It was also announced that Fannie Mae will work with its lender partners over the next year to develop a pilot program to save consumers at least 10 percent of the cost of buying and financing a manufactured home.
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Bankers vs real estate brokers
The battle between banks and real estate brokerage organizations is heating up. The National Association of Realtors has asked the Office of the Comptroller of the Currency to adopt a regulation that will prevent federally chartered banks from entering real estate brokerage and property management business activities, as they seem determined to do.
The OCC adopted a regulation in February that preempts state banking laws and exempts national banks from having to comply with state banking laws, including those protecting consumers from predatory lending and other abusive banking practices, it was stated in a report from NAR.
NAR asked the OCC to enact a regulation that would prohibit national banks that are exempt from state control to enter real estate brokerage and property management functions. Such a rule would provide the real estate industry with the assurance it needs that the issue of banks involvement in real estate brokerage activities will not be decided unilaterally by administrative fiat, said David Lerear, NAR’s chief economist.
Taken together, these two regulations could create the real estate industry’s worst nightmare. The largest banks in the nation could control large segments of the real estate industry, both brokerage and finance, with no stat regulation, he added.
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Income tax tips
Many families and individuals purchased their first home last year, being motivated by historically low mortgage interest rates. Those buyers are now wrestling with their income tax forms and wondering what items in that home buying transaction are legitimate tax deductions. Tax laws change often and produce complicated and confusing forms, especially for new first-time home buyers. More than 18 million people either purchased a home or refinanced an existing mortgage last year, according to Freddie Mac, a major buyer of existing home mortgages.
Last year’s home buying spree can translate into more tax deductions and big refunds this year, said Andrew Martin, Tax Services Manager and certified public accountant (CPA) with Fiducial, a provider of financial services for small businesses and individuals. But care must be taken. Otherwise, it could result in big mistakes. Most people aren’t aware of all allowable deductions and keep poor records.
When it comes to taxes, we’re a nation of procrastinators, he said. People wait too long, and in the rush to file wind up overpaying the government. Taking the right steps at the right time will result in big tax-savings to owners, both in the year they buy their home and long afterwards.
Martin offered the following tips:
Carefully check closing statements for all possible deductible items. Many new homeowners miss deductible items buried in their closing documents. Establish the basis of your home. The amount paid for a home is the starting point in determining the home’s basis. But the basis includes most settlement or closing costs, and any debt assumed all of which are on the homebuyer’s HUD-1 Uniform Settlement statement. The basis is important in determining all available tax deductions that can be taken. Adjustments in the basis should be made if there were home improvement projects that increase the home’s value.
Seller-paid mortgage loan points are deductible. Many homeowners forget to include these fees when they are preparing the taxes for the year. Be sure to deduct non-amortized points from a prior refinance transaction. If homeowners pay points to obtain a refinance loan, those points are deductible. But they must be amortized over the life of the loan. If the homeowner sells or refinances the home again and the original loan is paid off early, the balance of non-amortized points can be taken as an itemized deduction that year.
Keep records of moving expenses. There are a number of deductions that can be taken related to moving expenses. Homeowners should keep all receipts and proper records to take advantage of tax-savings. Deductible expenses include any cost in moving household goods, travel or lodging incurred en route to the new home, and storage of home furnishings.
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Jim Woodard writes a nationally syndicated newspaper column on real estate news and trends, carried in about 230 U.S. newspapers along with freelance features. Reproduction of this report, in part or entirety, is prohibited without the express permission of the author. E-mail: storyjim@aol.com. Web site: www.jimwoodard.net/.