Greg Cowart on Zillow
Greg Cowart - Mortgage Broker or Lender at The Securus Group
Greg Cowart - Roseville Loan Guy

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What does the debt ceiling have to do with your mortgage interest tax deduction?

While the Congress tries to find a solution to the debt ceiling mess, even though it has nothing to do with the debt ceiling what-so-ever, higher ups in Washington are trying to bring the mortgage interest deduction into the conversation. Opinions differ from those that want to get rid of it entirely, to those that want to make adjustments, and those that simply say leave it alone.

As of today any homeowner is able to deduct the amount of interest they pay on their mortgages from their taxable income. The deduction is very valuable for many, and can even bring down your income tax bracket, significantly lowering the amount of tax you owe.  This deduction is limited to the first $1,000,000 on the home. Home equity line of credit (HELOC) interest also qualifies, but the deduction for those are limited to $100,000 over the first mortgage’s deduction (and the two combined are still limited to the first $1million of the home’s debt).

Proposals include cutting the cap in half, to $500,000 of mortgage debt, for primary residences and possibly eliminating the deduction for second homes. On the other side of the coin are those who believe that the credits should favor investors, rather than primary residents, as that would create more financial incentive for real estate investment.

I think we’ll probably see something more like capping the maximum deduction to interest on the first $500,000 of mortgage debt, as this is the most fair way to the vast majority of Americans to alter the tax credit, as it will not affect them at all. This is most likely and seeing the credit disappear completely is almost guaranteed not to happen.

Either way it seems that some sort of change is coming. The good news is it appears that the credit will still be here for the vast
majority of us. And for those of us with mortgages over $500,000, you’ll still have your credit, only the benefit will probably be cut off on the interest on the first half million of your mortgage debt.

~Greg

FHA 5/1 ARM, a fools bet, or are you a fool to ignore it?

This is an answer to a question posted to me in Zillow.com. A homeowner in Southern California was pondering a 5/1 FHA ARM with their loan officer. Of course it’s sad to me that one would have to turn to a bunch of strangers on a website to ask this question when their LO should be able to provide this information (but it doesn’t surprise me knowing as many loan officers as I have over the years). Anyways, here’s my answer…

“Anna,

I’m going to have to make a couple small estimates without knowing everything (which I could not know without actually having an application and ordering some documents from HUD) but this should be pretty close to accurate give when you’ve told us.

Right now your P&I + MI is $4147.02. As an estimate I used $457,000 as a new loan balance, should you be able to refinance into a 5/1 ARM at 3.85%, and came up with a P&I of $2142.45 + MI of $342.75 for a total of $2,485.20 and a difference of $1,661.82 a month!

Looking at this we know that the FHA 5/1 ARM is fixed for 5 years and can change by a maximum of 1% every year after the first 5 years. So it would actually be a full 7 years before the rate could increase to what it is today, a full 8 years before it could be higher than it is today, worst case scenario. So we’re looking at a 5/1 ARM with close to 8 years of rate safety. Not too bad.

Lets dig further… So you’re saving $1,661.82 a month for the first 60 months of this loan. If you were to be disciplined and save this for those 60 months, even if you earned NO interest you would have saved about $100,000 compared to your current payment before the payment could adjust even 1%. Over 8 years, by the time your payment could be more than it is today, you’d have saved about $140,000. Again, this is while earning NO interest on that money along the way (which you obviously wouldn’t do).

So, worst case, 8 years from now you have $140,000 (probably a lot more) saved and your payment has finally risen to be slightly higher than it was in 2011. Will the market have recovered enough to sell? I don’t know but I’d assume so. Has your income increased? Again we don’t know but we can pretty safely assume so. If not, you have $140,000 in the bank to bridge the gap now that, 8 years later, your payment is finally higher than it was in 2011.

Again this is not taking into account tax savings, compounding interest on the money saved, the fact that your rate is not guaranteed to increase by 1% annually (it can be less, or even go down), or the fact that you’ll also be paying down principal faster, etc. I’m looking at this very conservatively, the wealth building opportunity could, and probably would, be even bigger.

I would asses the refinance with your financial planner and create a plan, a plan you will force yourself to stick to, if you want to make the most of it. Maybe you only save $1,000 a month from the $1,661 and use the other $661 for whatever you want. You’d still save $60,000 over the first five years and put another $40,000 in your pocket for whatever you want to do. Either way the 5/1 FHA ARM is a great opportunity if utilized correctly, as I illustrated in the above scenario.

Sincerely,
Greg”

40 Year loans, bad mistake or a huge opportunity?

That’s right, the 40 year mortgage is coming back around. I’ve recently seen one of our wholesale banking partners offer a 40 year mortgage that is interest only for the first 15 years, then turns into a 25 year fixed so there is very little risk of the payment exploding and you would lose your house after the interest only period. I know I know. Conventional “wisdom” says this is crazy, all you will be doing for the first 15 years is paying interest, not paying the principal down one bit. With all those radio commercials we’re bombarded with every day telling us we need a 10 or 15 year mortgage I wouldn’t blame anyone for not seeing the opportunity…

However the best and brightest financial planners may tell you otherwise. They see a HUGE wealth building opportunity. NOT an opportunity to buy a house we can’t afford, but an opportunity to save A LOT of money and create TRUE FINANCIAL SECURITY for us and our families. I know it seems backwards, but it’s not. Now I’m not recommending this product for everyone, each and every individual has different needs, but only to bring up the fact that these loans are being offered and to let you know there is HUGE opportunity and benefits that come with it.

If anyone has any questions or comments, or wants to discuss proper mortgage planning please leave a comment or let me know.

~Greg

Little-Known Facts About Your Credit Report & Credit Reporting And What “They” Don’t Tell You

Home ownership is one of the keys to building wealth!  But, almost 98% of home buyers need a mortgage loan in order to buy a home for their family—or purchase rental property.  

The first thing and I mean the VERY FIRST THING, that lenders look at is your credit report.  Believe me when I say there is A LOT of bad information on the topic of credit scoring—or it could simply be that the person advising you doesn’t really know how complex the credit scoring issues can be.  

You need to know your options.  

This White Paper is just the tip of the iceberg.  

But I wrote this white paper to give you some little-known facts to help you understand your credit report and credit scores.  

So here it goes: 

What is a Credit Report? 

FACT:  The Federal Reserve Board (FRB) shares that Your Identity, Your Existing Credit, Your Public Records and Inquiries are all parts of a consumer credit report.  

Little-Known Fact: What they fail to mention is some things that are NOT reported that many people think ARE reported or affect their scores.  

ü   Your Household Income or Personal Income is NOT reported or used for scoring.  

ü   If you are married, your credit files are NOT merged together. (Only joint accounts  will show on both spouse’s credit reports.)  

ü   Even though your birthday is reported, your age cannot affect your score or chances of  approval. (One exception is the reverse mortgage which has an age requirement.) 

Continue reading Little-Known Facts About Your Credit Report & Credit Reporting And What “They” Don’t Tell You

Being seduced by a 15 year mortgage?

Mortgage rates are sitting at record lows. If you haven’t refinanced lately, maybe you should consider it. And when you do, don’t be tempted to obtain a 15-year mortgage. Instead, stick with the 30 year fixed. Let me tell you why…

We’ll say you’re refinancing a $250,000 mortgage and you have two choices, a 30 year fixed and a 15 year fixed…

With the 15-year loan, it LOOKS LIKE you will save $144,614 in interest by paying $539 more each month.

But that just isn’t the case. This illustrates the interest you’d pay over 30 years compared to the interest you’d pay over 15 years. It is more accurate to compare what happens with each loan after the first 15 years.

Sooo…. For the first 15 years of a 30 year mortgage, you’ll pay a total of $151,280 (or 68% of your payments) in mortgage interest. That means 68% of your payment is tax-deductible. With the 15-year loan, only 26% of your payment is interest — meaning MUCH less is tax-deductible.

And what does that mean to you? Assuming you are in the 25% tax bracket…

At The End Of The 15 year Loan:

Not only does the 15 year mortgage force you to pay an extra $539 a month, money that you can’t use on anything else during the month and you’ll have ZERO flexibility with if you need the cash, you’ll also spend an extra $116,077 out of your pocket! 

I know what you’re saying, “but now my home is paid off, it was worth it.”

Well, if you were to invest that $539 difference in monthly payment at a conservative annual return of 7%** you’d accumulate $170,843 — enough to pay off the $169,710*** balance that’s left on your 30 year mortgage with, and pocket the extra $1,100, anyways.

But you wouldn’t do that because then you would see the folly in the 15 year mortgage. Not only does the homeowner lose HUGE in the tax department, they didn’t benefit from paying that $539 a month because they have enough to pay off their mortgage if they wanted to. And now it’s 15 years later and your income will probably be much higher and your fixed rate mortgage, with 15 year left, will be a much lower percentage of your income, so it’s much easier to pay.

When weighing whether to refinance or purchase new home, contact a professional mortgage consultant to help you make the right decision. As the above demonstrates, the best choice is not always obvious.

I have learned a lot about planning for the future and using one’s mortgage as a financial tool to build wealth and attain real financial security rather than a debt to be gotten rid of as quickly as possible by reading Ric Edelman’s books. For more information on this strategy as well as Ric’s 11 Reasons to Carry a Big, Long Mortgage, read the newly revised edition of The Truth About Money, available December 21.

*Assumed interest rate and monthly payment are for illustrative purposes only.
**Assumed 7% rate of return for illustrative purposes only.
***Assumes a federal tax bracket of 25%, no withdrawals and no dividend reinvestment.

“Walking away” from your mortgage? Maybe think twice…

With so many homeowners underwater I hear daily about people “walking away” from their homes, as if it was such an easy decision to make. Maybe it is? With it becoming so commonplace these days maybe it is an easy decision to walk away from your home and mortgage when you owe more than your home is worth. What was once considered an EXTREMELY reckless move is not only tolerated these days, it’s being encouraged… Even amongst those that currently are not behind and have no problem making their payments. Even the so-called “experts” in the media are suggesting that homeowners will come out ahead if they stop making payments on their loans. Are they right? Lets look at this from a true mortgage planner (and a financial planer’s) point of view.

Forget for a moment the vast legal and moral reasons to keep your home and make the payments you agreed to when you bought (or refinanced) it in the first place, even though those reasons have become easier to dismiss in today’s world, and realize there are some very real consequences to defaulting on your mortgage, not limited to killing your credit score and making it so you can not buy a home (and lose all of the REAL benefits of being a homeowner) for at least 2 to 3 years. In the short-term it seems obvious, why keep making payments on something that isn’t even worth the debt that is carries? One big piece of the American financial system is how much leverage is built into the housing market and being a homeowner. People who wouldn’t consider borrowing money to invest in anything else gladly pile on the leverage when it comes to Real Estate, often borrowing close to the full purchase price of the home (a great financial strategy if used correctly). Of course that is because most of us don’t have the cash to buy a home outright – and if we did it would be the worst financial decision we could make, but that is another story for another day – but however our homes are an asset like any other. Like all assets, values go up and down and leverage magnifies both losses and gains.

Lets look at a home that sold in Roseville during the height of the market in 2005 or 2006, it sold for $450,000 and the family put 10% down when escrow closed obtaining a conforming mortgage of about $405,000. Lets assume all homes in Roseville have dropped about 25% in value since, and the home is worth now $337,500. If this homeowner stops making payments and “walks away” from the home they automatically lose their $45,000 down payment, all interest paid, and principal payments as well. A huge financial loss. People looking at this option sometimes still seem to think walking away from their home and the mortgage is the right move, capping the losses there. The Sacramento real estate market is not good for sellers and probably wont be for a while and they can probably rent the nicer house next door for less than their current mortgage payment. In a simple world this makes sense, but our world is not that simple.

This decision assumes a static housing market where home prices are fixed at their current low values (real estate always appreciates when viewed over the longer-term period and we’re already seeing prices stabilize and start to rise since last Summer). Everyone knows the ABC’s of investing, buy low sell high, but just like the stock market people do it backwards. Selling on the bad news and buying when prices have come back up, in this case it’s no different with Real Estate. People are essentially “selling” low, the exact opposite of what they should. Assuming prices continue to stabilize and appreciate at a modest annual rate of 5% (the National Association of Realtors data shows average appreciation of 6% historically, even taking into account the huge drop in home prices of the last 2-3 years) until the loan is paid off in 2035, this Roseville home will be worth approximately $1,200,000. Of course this homeowner might not want to wait 25 more years, they may want to sell 10 years from now, when this home will be worth $549,750, a decent gain of more than $200,000 more than today’s value, and still $100,000 more than the original purchase price. Which we’ll remember was purchased at the height of the market back in 2005. In my opinion that doesn’t seem too long to realize a $200,000 gain compared to almost a $100,000 loss by walking away today. Especially considering this investment is your home, the place you live, where you keep your stuff, raise you kids, etc. There’s a real good chance you’d been keeping it for 10 years anyways.

Then there is the opportunity cost of walking away with home prices at the bottom of the market and likely to go up. By the time those walking away today are again credit-worthy enough to obtain financing for a new home they’ll have missed years of appreciation, low interest rates, and today’s rental rates will have gone up. Possibly stuck as a renter forever because they can’t afford the current home prices at current rates five years from now. Before long their rent will assuredly be more than they original mortgage payment was and there will be nothing they can do about it.

In the end I hope you see the case for staying in many situations, and that that case is far more compelling that first it seems. Not to mention fulfilling one’s obligations is just the right thing to do. So there is more than just financial reasons for doing so (and we didn’t even take into consideration all of the lost tax benefits of not owning a home, higher interest rates paid on all other credit and other accounts, such as utilities, chance of not getting a job, a deficiency judgment levied by the current lender, massive IRS fees, etc that we won’t have to face/lose if we make the decision not to “walk away”). If anything I recommend homeowners look into one of the government’s new refinance programs to take advantage of tofaday’s low rates, or talk to their lenders to try and get a loan modification or modified payment plan. In reality it’s the monthly payment that matters most right now, and that payment was just fine when your home was worth more, if you can get a lower payment it’s just the obvious and right thing to do.

~ Greg