This Week's Blog

Whenever I speak with a new client, I try to always ask them what is important to them in choosing a mortgage lender to work with. 10 times out of 10, they say the lowest interest rate and the lowest cost is the most important. Obviously, a low interest rate at a low cost is important, but I would beg to differ that it is THE most important thing. However, since I'm not one to argue with customers, I will give you some tips on shopping for a mortgage to ensure that you are in fact getting the best deal and, and I stress this is a big AND...working with a competent mortgage professional. A person's home is typically their single largest investment and it's too important to place the financing of this investment into the hands of a person who is not capable of advising you properly based on YOUR SPECIFIC goals.

When speaking with a mortgage lender, there are four questions that you need to ask them to determine their competence and their understanding of the market. If the lender is unable to answer these questions correctly...RUN- DO NOT WALK-TO ANOTHER LENDER.

Questions:

1-What are mortgage rates based on? The only correct answer is that rates are based on Mortgage Backed Securities or Mortgage Bonds.  Interest rates are not based on the 10-year Treasuries.  This is a common misconception as mortgage bonds sometimes trend in the same direction as the 10 year Treasury note.  It's not uncommon though for them to go in opposite directions.  It's important to work with a lender who is watching the correct indicator.

2-What is the next Economic Report or event that could cause interest rate movement? A mortgage professional should be able to provide you with this information easily.  For an up to date calendar of weekly economic reports and events that may cause interest rates to fluctuate, call me, and I would be happy to provide you with this information.

3-When Bernacke and the "Fed" change rates, what does it  mean...and what impact does it have on interest rates?  When the Fed changes rates, they are changing a rate called the Federal Funds Rate.  This is a short term rate that affects credit card rates, credit lines, auto loans and so on.  First mortgage rates most often will actually move in the opposite direction due to the dynamics within the financial market. For further explanation on this, please give me a call or you can read additional information  here: http://www.lenderforlife.net/Why+The+Fed+Cut+Caused+Mortgage+Rates+to+Rise

4-What is happening in the market today and what do you see in the future? If a lender can not explain how mortgage bonds and interest rates are currently moving as well as what is coming up in the near future, you are talking with someone who is reading last week's newspaper and not someone who you should entrust your largest investment with.

Again, a mortgage professional needs to be able to answer ALL FOUR of these questions. If they can't, find a professional who can.

The last thing that I'd like to mention about shopping around for the best interest rate is that buying an interest rate is very much like buying a stock in that until you purchase the rate (ie. lock in the rate), it is subject to change because it's based on the market conditions at that time.  This means that when you're reviewing quotes from multiple lenders, it's imperative that you make sure you are looking at quotes from the same day AND make sure that the loan structure is the same.  There is more than one way to structure a loan and that is one variable that can affect the interest rates that are quoted.

For additional information, don't hesitate to contact me at cdecandia@lenderforlife.net or visit my website http://www.lenderforlife.net.

There is much confusion among consumers about the different types of loan originators/officers and which type is really best to work with when trying to obtain a new mortgage.  My goal with this article is to explain the three types of mortgage originators and go through the pro's and con's of each type. 

The first type of mortgage provider is perhaps the most common- the Bank. A retail loan officer is one who provides mortgage loans directly through the banks they work for. Examples of these would be a loan officer that works directly with Bank of America, Wells Fargo, SunTrust and so on.  When a loan is originated through a retail bank, the origination, processing and underwriting is done by the bank.

The benefits of working directly with a bank are:

1-You often have the opportunity to also have your checking/savings accounts with the same bank which is important to some people.

2-You can often walk directly into a local branch and speak with someone regarding the servicing of your account instead of calling an 800#.

3-Some people feel a sense of security by working directly with a bank, although there is actually no more security than the other entities.

The cons of working directly with a bank are:

1-You are limited to that specific's bank loan programs and interest rates.  If the bank does offer the specific program you need, you will not be able to access that program.  Also, the interest rates are fixed with little ability to negotiate and you only have access to that bank's rate sheets.  This is more time consuming to the consumer if they wish to shop around for the best rate and program available to them.

2-The underwriting or operations centers are often seperate from the loan originators.  This means to you that your loan officer is less likely to know and have a good working relationship with the processor and underwriter.  A good working relationship with the processor and underwriter is especially important in this market with all of the program changes.

3-Bank loan officers are currently not required to be licensed.  This means that there is no standard test or anything that they need to pass in order to originate your loan.  Since your home is typically your single largest investment, I don't know that I would want an un-licensed loan officer handling that transaction and feel confident in their ability to advise me correctly based on my specific goals.

The next type of mortgage provider I would like to discuss is the mortgage broker.  A mortgage broker does not work for a bank, but rather has agreements with many banks that allow them to sell the bank's mortgage programs.  When a loan is originated by a broker, the processing and underwriting is done by the bank.

The benefits of working with a mortgage broker are:

1-A broker can shop around for you to the many different banks that they have relationships with. This saves you, the consumer, a lot of time in looking for the best rate that is on the market.

2-Since a broker has access to multiple banks, they have access to many types of loan programs that a single bank may not have access to.

3-A mortgage broker is required to be licensed and pass both a national and state exam.  This ensures, at least on some level, that the loan officer has the requisite knowledge mandated by the state.

The disadvantages of working with a mortgage broker are:

1-Since they don't actually work with the banks they are representing, there is a higher risk for the banks. This often results in additional hoops that you will have to jump through to ensure your loan is approved and is a profitable one for the bank.

2-Brokers typically don't have the opportunity to know and develop a relationship with the bank underwriters.  This means that they may not be able to be as proactive or foresee underwriting challenges because they don't have the opportunity to speak with them.  This is especially important on loans that may be more challenging or not as black and white.

3-As banks are feeling the pressures of foreclosures and bad loans on their books, several have made the decision to exit the wholesale business which means that brokers will not have access to their loan programs.  Bank of America is a recent example of this.

4-There are some loan programs that mortgage brokers do have access to and are only available to banks.  An example of this type of program is NC Housing which offers many 1st time home-buyer programs as well as down payment assistance.

The last time of loan originator I would like to discuss is a corresponent lender.  This type of lender is a hybrid between a retail bank and a mortgage broker.  A correspondent lender will typically fund the loan at closing and then transfer the servicing to the intended bank.  When a loan is originated through a correspondent lender, the origination, processing and underwriting is completed by the correspondent lender and not the bank.

The advantages of working with a correspondent lender are:

1-Loan originators have access to multiple banks similar to mortgage brokers.   This saves you time in needing to shop around yourself to multiple banks, and you can focus on finding a loan officer you feel comfortable with.

2-The processing and the underwriting is done by the correspondent lender and not the retail bank. This is a huge advantage to you as a consumer because your loan officer can develop the relationship with the processor and the underwriter.  This is especially helpful on potentially challenging loans.  At Primary Residential Mortgage, both the processing and underwriting is done in the office which means that if I have a question, I can just walk into my underwriter's office and ask the question and work through the loan approval with them.

3-Since a correspondent lender has access to multiple banks, they also have access to all of the bank programs as well and are not limited.  Another advantage over a broker in this case is that they also have access to programs that are typically limited to retail banks such as NC Housing, down-payment assistance and other 1st time homebuyer programs.

4-A correspondent lender is also required to be licensed and pass both a national and state exam. 

The disadvantages of a correspondent lender are:

1-Correspondent lenders do not have retail branches.  This means that you as a consumer may not be able to walk in a branch and talk to someone about your loan.  This wouldn't be the case though if the bank that bought your loan such as Bank of America, Wells Fargo or SunTrust had branches in the area you live. 

2-Some consumers feel more comfortable and secure working directly with the bank even though there is not technically any more security having your loan originated through a retail bank.

I hope that this analysis helps you to better understand the different types of loan originators and the pro's and con's of working with each.  As always please don't hesitate to contact me with any questions that you may have.

Some of you may wonder why you're seeing information on tax laws on a mortgage blog.   My goal with this blog is to provide useful information surrounding mortgage, finance, and real estate.   Taxes are a large part of that.  My CFP (Certified Financial Planner), Blaine Bowers with Private Client Advisory, has been kind enough to put together tax information which I hope you'll find useful.

- Cari DeCandia, CRMS

27 Things You Should Know About The 2011 TAX LAWS 

Provided by

Blaine Bowers, MBA, CFP®

2011 is here and there is much to report. Congress has restored the estate tax, cut the payroll tax and retained and/or restored a variety of tax breaks.

Here’s a look at some recent developments in federal tax law – not just the changes for 2011-2012, but also the decisions (some quite recent) that may impact your 2010 return. This is by no means a tax planning guide, just an update on what has changed and what hasn’t.

Before we get started, some news about filing your 2010 federal return:

• Due to a lag in IRS processing systems, you will need to wait until at least mid-February to file your return if you are going to claim …

1. Itemized deductions on Schedule A
2. the Higher Education Tuition & Fees deduction
3. the Educator Expense deduction

•  This year, the federal income tax deadline is April 18. That’s because April 15 is a holiday in the District of Columbia (Emancipation Day).
• Correspondingly, all taxpayers who file for an extension this year will have until October 17 to file their 2010 returns.¹

Here’s a look at the numerous revisions, alterations and restorations to federal tax law affecting tax years 2010, 2011 and 2012.

1 The federal income tax brackets remain at 10%, 15%, 25%, 28%, 33% and 35% for 2011-2012.

The ordinary taxable income brackets for TY 2011 are set as follows, reflecting minor COLAs:

Single Taxpayers:

•  
  • 10% bracket has a ceiling of $8,500
  • 15% bracket starts @ $8,501
  • 25% bracket starts @ $34,501
  • 28% bracket starts @ $83,601
  • 33% bracket starts @ $174,401
  • 35% bracket starts @ $379,15

Married Filing Separately:

• • 10% bracket has a ceiling of $8,500
  • 15% bracket starts @ $8,501
  • 25% bracket starts @ $34,501
  • 28% bracket starts @ $69,676
  • 33% bracket starts @ $106,151
  • 35% bracket starts @ $189,576

• Head of Household:
  • 10% bracket has a ceiling of $12,150
  • 15% bracket starts @ $12,151
  • 25% bracket starts @ $46,251
  • 28% bracket starts @ $119,401
  • 33% bracket starts @ $193,351
  • 35% bracket starts @ $379,151

• Married Filing Jointly or Qualifying Widow/Widower:
  • 10% bracket has a ceiling of $17,000
  • 15% bracket starts @ $17,001
  • 25% bracket starts @ $69,001
  • 28% bracket starts @ $139,351
  • 33% bracket starts @ $212,301
  • 35% bracket starts @ $379,151²

2 The payroll tax paid by employees and the self-employed has been reduced by 2.0% in 2011.

This means many Americans will effectively get a 2% raise this year. The reduced withholding could mean as much as $2,136 in savings, as earnings up to $106,800 are subject to payroll tax. No phase-outs apply, and if taxpayers are married, both spouses can get the individual deduction.^3,4

Two related notes:

• The partial credit for payroll taxes paid by employers is gone this year.⁵
• As a result of this payroll tax holiday, the Making Work Pay credit is gone for 2011. However, many taxpayers can still claim the Making Work Pay credit for 2010 ($400 for individual taxpayers, up to $800 for taxpayers married filing jointly, income phase-outs applicable).⁶

3 The estate tax is back for 2011- 2012.

For this year and next, the federal estate tax is set at 35% with a $5 million individual exemption.⁴ Please note that:

• The $5 million individual exemption is portable. This means that an executor may elect to transfer an unused $5 million individual estate tax exemption (upon the death of one spouse) to the surviving spouse. So with this new portability, a married couple could potentially transfer up to $10 million of assets without incurring federal estate tax.⁷
• In 2011, an executor of an estate for a decedent who died in 2010 may choose between two options in administering said estate. That executor can elect to
• Subject the estate to the 2011 federal rules (35% estate tax, $5 million estate exemption, stepped-up basis for appreciated assets per IRC rule 1014).
• Subject the estate to the 2010 federal rules (0% estate tax and the $1.3 million modified carryover basis for appreciated assets in the estate, which becomes $3 million for assets passing to a surviving spouse).⁸

4 The estate tax, the gift tax and the generation-skipping tax (GST) have all been reunified for 2011-2012.

They all have top rates of 35% with $5 million individual exemptions. The individual estate and gift tax exemptions are portable between married couples; the GST exemption is not. The GST has been restored for 2011; it was 0% in 2010.^4,8

The annual gift tax exclusion remains at $13,000 per donor in 2011. A single taxpayer may gift up to $13,000 to an unlimited number of individuals. The lifetime exclusion (see above) is $5 million.⁴

In addition to the annual exclusion, an unlimited gift tax exclusion is allowed for amounts paid on behalf of a donee directly to an educational organization for tuition. Likewise, amounts paid directly to health care providers also qualify for the unlimited gift tax exclusion.⁹

 5 Tax rates on capital gains and dividends haven’t been hiked.

 In 2011 and 2012, the long-term capital gains rate is

• ^·          0% for taxpayers in the 10% and 15% brackets.
• ^·          15% for everyone else.⁴

6 Traditional IRA owners who go Roth this year can’t defer income resulting from the conversion into subsequent tax years.

In 2010, you had that option; this year, you don’t. If you went Roth in 2010, you have until October 17, 2011 to choose whether you wish to divide the income from the conversion between your 2011 and 2012 federal returns.⁴

7 High earners won’t be bitten by “stealth income taxes” during 2011-2012.

The Pease and PEP limitations – repealed for 2010 – are now on holiday through 2012. A quick explanation if you’ve never heard of them: the Pease provision cancels out up to 80% of the amount of a taxpayer's itemized deductions if his or her AGI exceeds a certain level. In other words, you can deduct the full amount of your itemized deductions in 2011. The PEP (personal exemption phase-out) whittles away at the personal exemption benefit for taxpayers who reach certain AGI levels.^4,10

8 The charitable IRA rollover is back – at least for 2011.

In federal tax law, this is known as a Qualified Charitable Distribution – a tax-free donation of IRA proceeds to a qualifying charity or nonprofit. Given the generous $5 million individual estate tax exemption now in place, there may be less impetus to make such gifts – but nonprofits are just glad the opportunity is back.

To be tax-free, the donor must be 70½ or older and the donation has to take the form of a direct transfer (a rollover) from your IRA trustee to the qualifying charity, nonprofit foundation or nonprofit organization. (You can also make a tax-free donation of IRA proceeds to a fund held by a community foundation, but not a donor-advised fund.) You cannot claim a charitable tax deduction from this move.¹¹

Will this opportunity stick around after 2011? We don’t know. It is set to sunset at the end of the year.

• The Tax Relief Act of 2010 gives donors who make such Qualified Charitable Distributions before through January 31, 2011 the option to have them treated as QCDs on their 2010 federal tax returns.¹¹

9 The Small Business Jobs Act of 2010 extended some tax breaks and put some tax changes into play for small companies in 2011.

The SBJA was passed into law during September 2010, and its recently enacted laws will affect both 2011 and 2010 federal returns. 

• Full business expensing is permitted for 2011, just as it was in 2010. The IRC Section 179 expense deduction limits of 2010 remain in effect this year. A small business can write off 100% of the expense of qualifying equipment or computer software made in 2011 with a $500,000 limit. The capital expenditures can be on new or used equipment. Your company has to be profitable in order for you to take full advantage of the write-off, and you can’t take complete advantage of it if you have spent more than $2 million on qualifying capital in the given tax year.^12,13

• 100% exclusion possible on gains from small business stock. If you bought such stock after September 27, 2010, any gain may qualify for a 100% exclusion under IRC § 1202.).¹³

• The bonus first-year depreciation has been extended. If your company purchases new tangible or intangible property in 2011 (which includes buildings, machinery and equipment, vehicles, furniture, software and even patents and copyrights), your company can claim 100% of its cost as long as your business uses the property before 2012. This 100% depreciation also applies for tangible or intangible property bought after September 8, 2010. You can also claim 50% depreciation on purchases of this kind made from January 1 - September 7, 2010 as long as the tangible or intangible property is put into service prior to 2013. (Real property is not eligible for this tax break.) ^12,13

• The deduction for start-up expenses has doubled. The Small Business Jobs Act of 2010 raised it to $10,000 for 2010 and subsequent tax years. Phase-outs on this deduction now kick in at $60,000 worth of startup expenditures (previously, it was $50,000).¹³

• Some businesses may be able to claim a major health care tax credit. Does your business have 25 or fewer full-time employees? Are you paying most of them less than $50,000 annually? Do you pick up the tab for 50% or more of their health insurance premiums? If so, you may be able to deduct up to 35% of the money you spend on those premiums in tax years 2010-2013. To get the full 35% credit, you must have 10 or fewer full-time employees with annual wages averaging $25,000 or less. Above that, phase-outs apply. The tax break is unavailable if you have more than 25 full-time employees or if you pay your full-time employees average wages of more than $50,000.^12,13

• The carryback period for eligible small business credits under IRC § 38 was extended from 1 year to 5 years. This was put into effect for the 2010 tax year. Such credits may be used to offset both regular tax liability and AMT liability.¹³

• The depreciation deduction has increased for business-owned vehicles. The SBJA increased the maximum deduction for a passenger automobile first placed in service in 2010 to $3,060. The maximum deduction for a truck or van first placed in service in 2010 increased to $3,160. Remember that the car or truck has to be totally used for business purposes to take full advantage of the deduction.¹⁴

• In 2011, the holding period for S corporations is reduced by 2 years. The SBJA cut the holding period from 7 years to 5 years for 2011. So if your C corp elected to convert to an S corp as recently as 2006, it can sell appreciated assets this year without paying the built-in corporate level tax. This provision only applies in TY 2011.¹⁵

10 Employers must begin reporting employee health care benefits on Form W-2 in either 2011 or 2012.

This is an effect of the Affordable Care Act. For informational purposes, employers are now required to report the value of the health insurance coverage they offer to employees on W-2s. The IRS is offering employers a one-year grace period, however: it has deferred the reporting requirement for TY 2011, so this year it is optional. Reporting the value of the health care coverage to the IRS will not affect the taxable income of your employees.¹⁶

11 Landlords must abide by new IRS reporting requirements.

Prior to 2011, only full-time property managers and some lessors had to file 1099 forms with the IRS as a consequence of doing business. The Small Business Jobs Act of 2010 changed that.

Anyone who receives rental income in 2011 has to file a Form 1099 for all payments of $600 or more made to service providers – handymen, plumbers, carpenters, landscapers, electricians, any individual or company providing a service linked to your residential or commercial rental property. You don’t need to file 1099 forms for purchases of goods for your rental property, only services. Only aggregate annual payments of $600 or more for services have to be reported.

Unless Congress intervenes, such reporting will be demanded of all businesses, self-employed individuals and independent contractors come 2012.¹⁷

12 The first-time homebuyer credit is gone.

It expired at the end of September 2010. You can take advantage of the credit on your 2010 federal return if you closed escrow on a home before October 1, 2010 and had a binding contract in place prior to May 1, 2010.¹³

13 The personal exemption and standard deduction amounts have (barely) increased.

For 2011, the personal exemption amount increases by $50 to an even $3,700. Standard deductions are as follows for 2011:

• Single Taxpayers: $5,800
• Married Filing Separately: $5,800
• Head of Household: $8,500
• Married Filing Jointly or Qualifying Widow/Widower: $11,600²

14 The AMT has again been patched.

As part of the Tax Relief Act of 2010, the Alternative Minimum Tax exemptions were increased to these levels for 2011:

• Single Taxpayers and Heads of Household: $47,450
• Married Filing Separately: $36,225
• Married Filing Jointly or Qualifying Widow/Widower: $72,450¹⁸

15 The self-employed may be able to use the self-employed health insurance deduction to reduce their SECA taxes in 2010.

This was a mid-year tax law change that happened as a result of the SBJA. For TY 2010, self-employed business owners may deduct the cost of health insurance for themselves and their family members as a business expense when calculating self-employment tax. (You can do this on Schedule SE, Line 3.) Prior to 2010, the self-employed could only deduct health insurance costs for income tax purposes (on Form 1040, Line 29). A worksheet on all this accompanies IRS Form 1040. The health coverage must be arranged under the umbrella of your business, and you must not be eligible to participate in an employer-sponsored health plan.¹⁸

16 If you have a Flexible Spending Account, you can no longer use your FSA funds to pay for most over-the-counter medicines.

Insulin is a notable exception to this new rule. You can still use your FSA money for non-prescription medical or medically related items like crutches, wigs, contact lens solution and other items detailed within IRS Publication 502.⁴

17 Investment brokers have to provide the IRS with cost-basis reporting in 2011 when it comes to the sale of certain assets.

They must report the original purchase price of stocks, REIT shares and foreign securities to the IRS in 2011 when these assets are sold. In 2012, they will have to follow new rules for cost-basis reporting for mutual funds, bonds, options and many ETFs.⁴

18 If you own more than $50,000 in foreign financial assets, you may be subject to a new IRS reporting requirement.

You may have to meet additional reporting and disclosure requirements in 2011 in addition to filing an FBAR (Report of Foreign Bank and Financial Accounts). This new reporting requirement may impact hedge fund investors who previously didn’t have to file FBARs. Consult your tax advisor.⁴

19 The state and local sales tax deduction option is back for 2011 (and you can also claim it on your 2010 return).

Do you live where there are no local or state income taxes? Once again, you have the choice of taking a deduction for state sales taxes instead of the state income tax deduction for 2011 (and 2010).¹⁸

20 The $250 classroom supplies deduction for teachers is back for 2011 (and may be claimed for 2010).

Are you a K-12 educator who pays for classroom expenses out-of-pocket? Then you are able to take an above-the-line deduction to offset up to $250 of such costs.¹⁸

21 The higher education tuition and fees deduction is back for 2011 (and may be claimed for 2010).

The limit on this deduction is $4,000. (And if you’re reading this item, don’t forget about the American Opportunity Credit, a credit of up to $2,500 that can be used for the first four years of college and applied to the tuition costs and other higher education expenses.)^18,19

22 The adoption credit is larger – and it has been made refundable.

As you file your 2010 return, note that it is now $13,170 per child as opposed to $12,150 in 2009. As it is refundable, an eligible taxpayer can qualify for the credit even if he or she doesn’t owe any federal income tax. The adoption must be documented, so that means you can’t claim this credit via eFile.¹⁸

23 The Earned Income Tax Credit eligibility limit has increased to $48,362 and the Child Tax Credit has been expanded.

The result: more middle class and working class families may qualify for these credits. The CTC is a credit of up to $1,000. Under the new laws, you can claim the CTC if a child was no older than 16 in 2010 lived at home for more than half of 2010, and is claimed as a dependent on your 2010 federal return.¹⁹

24 If you bought a home in 2008 or 2009, you may have to repay up to 100% of any federal homebuyer credits related to the purchase on your 2010 Form 1040.

This is more likely if you bought your home during 2008. Most taxpayers will merely have to repay 1/15 of their credit in 2010. Consult your tax advisor.²⁰

25 Most unemployed individuals will have to report 100% of their 2010 federal jobless benefits as taxable income.

Not everyone who is unemployed realizes this. In 2009, the first $2,400 of federal unemployment insurance came to you tax-free. There was no such tax break offered for 2010.²⁰

26 No more real estate tax deduction for those that don’t itemize.

This is just a reminder that you can’t claim this deduction on your 2010 federal return. The additional standard deduction for property taxes went away at the close of 2009.²⁰

27 No more sales tax deductions for buying a new car or truck.

Blaine Bowers, MBA, CFP®

Family Wealth Counsel

Private Client Advisory, Inc.

(919) 621-7138

bbowers@privateclientadvisory.com

Securities and advisory services offered through The Strategic Financial Alliance, Inc. (SFA), member FINRA, SIPC which is otherwise unaffiliated with Private Client Advisory, Inc. Supervising office 770.297.9000.  This Special Report is an update of 2010 and 2011 tax law changes, and is not intended as a guide for the preparation of tax returns. The information contained herein is general in nature and is not intended, and should not be construed, as legal, accounting or tax advice or opinion provided by Donald L. Crider, JR. and Peter Montoya Inc. to recipients. No information herein was intended or written to be used by readers for the purpose of avoiding penalties that may be imposed under the Internal Revenue Code or applicable state or local tax law provisions. Readers are cautioned that this material may not be applicable to, or suitable for, their specific circumstances or needs, and may require consideration of non-tax and other tax factors if any action is to be contemplated. Readers are encouraged to consult with professional advisors for advice concerning specific matters before making any decision, and Donald L. Crider, Jr. and Peter Montoya Inc. disclaim any responsibility for positions taken by taxpayers in their individual cases or for any misunderstanding on the part of readers. Donald L. Crider, Jr.  and Peter Montoya Inc. assume no obligation to inform readers of any changes in tax laws or other factors that could affect the information contained herein. Neither Private Client Advisory nor SFA give tax or legal advice.

Citations.

1 irs.gov/newsroom/article/0,,id=233910,00.html [1/4/11]

2 irs.gov/pub/irs-drop/rp-11-12.pdf [12/10]

3 bloomberg.com/news/2011-01-18/it-s-not-too-early-to-think-about-2011-taxes.html [1/18/10]

4 online.wsj.com/article/SB10001424052748703675904576063903166546250.html [1/8/11]

5 turbotax.intuit.com/tax-tools/tax-tips/IRS-Tax-Return/Summary-of-Federal-Tax-Law-Changes-for-2010-2017/INF12041.html#2011 [1/19/11]

6 walletpop.com/2011/01/19/dont-forget-about-the-making-work-pay-credit/ [1/19/11]

7 naepc.org/journal/issue07a.web [12/20/10]

8 blogs.forbes.com/hanisarji/2011/01/02/new-year-different-rules-2011-estate-tax-gift-tax-gst-tax-rules/ [1/2/11]

9 turbotax.intuit.com/tax-tools/tax-tips/Tax-Planning-and-Checklists/The-Gift-Tax/INF12036.html [1/27/11]

10 taxpolicycenter.org/press/press-resources-pease.cfm [1/18/11]

11 ctphilanthropy.org/s_ccp/bin.asp?CID=14889&DID=45124&DOC=FILE.PDF [12/17/10]

12 money.cnn.com/2011/01/17/smallbusiness/small_business_new_tax_credits/ [1/17/11]

13 journalofaccountancy.com/Web/20113750.htm [1/14/11]

14 irs.gov/formspubs/article/0,,id=177054,00.html [10/14/10]

15 s-corp.org/2010/09/28/president-signs-big-relief/ [9/28/10]

16 irs.gov/newsroom/article/0,,id=220809,00.html [1/14/11]

17 realtor.org/wps/wcm/connect/f9c47a804427e7068bf5eb34cafa6d66/government_affairs_issue_brief_rep_rules_1099rev.pdf [1/18/11]

18 irs.gov/newsroom/article/0,,id=233927,00.html [1/4/11]

19 bloomberg.com/news/2011-01-18/children-can-mean-extra-tax-deductions-and-credits.html [1/18/11]

20 smartmoney.com/personal-finance/taxes/whats-new-on-the-2010-form-1040-1295384880669/ [1/20/11]

21 montoyaregistry.com/Financial-Market.aspx?financial-market=finding-a-tax-preparer&category=31 [1/28/11]

I’m sure you’ve heard the sayings: “If it seems too good to be true, it probably is”, and “Nothing in life is free”. So, how can a no closing cost loan really be no cost? There’s got to be some costs hidden somewhere, no?

I have two goals I’d like to accomplish with this article:

1-Explain how no closing cost mortgages work- Yes, there really are no closing costs, and…

2-Explain how mortgage lenders get paid

Let’s tackle how mortgage originators get paid first because that will help with explaining how no closing cost mortgages work. I’m going to use the term mortgage originators, but am including retail loan officers that work with banks as well as correspondent lenders and mortgage brokers.

Mortgage originators can get paid either through an origination fee, paid by you, the consumer or they get paid a commission from the bank through selling you a higher interest rate or they can get paid a bit of both. I’m going to go further in depth on this in a minute.

Let’s think about interest rates and the cost for each rate on a sliding scale with the par rate or base rate in the middle. The par rate is lowest rate that a bank if offering without paying discount points to buy the rate down. The par rate will typically have an origination fee associated with it because the bank is not paying any type of commission at this rate.

For example’s sake, let’s say the par rate today on a 30 year fixed is 4%. Interest rates above 4% will pay a commission. The higher the rate, the higher the commission for the loan officer. Interest rates below 4% will cost you discount points in addition to the origination fee. A discount point is a percentage of your loan amount. So, if you wanted a 3.75% interest rate, the discount point may be .75%. With a $200,000 loan amount, that .75% would cost you $1500 in addition to the typical 1% origination fee. Now, whether or not it makes sense to pay a discount point will be covered in another article as I will be discussing not paying closing costs in just a bit.

So, the question you ask is…”Which rate do I choose? How much should I pay in closing costs?” Just about every customer I work with tells me that they want the lowest rate with the lowest closing costs. I want to respond…No kidding. That’s what everyone wants. But does it make sense to pay closing costs? Let’s think about this…

I will first explain how a no closing cost loan works. Above, I explained that the higher the interest rate above the par rate, the higher the commission. A no closing cost loan is simply where you have a slightly higher interest rate and the mortgage originator uses a portion of the commission that is paid by the bank to pay for your closing costs. Now, I’m sure you’re going to say- “Well, if I have a higher interest rate, I will be paying a lot more interest over the term of the loan”. And I would respond…”Yes, that would be true if you kept this loan for the next 30 years or whatever the term of the loan is”. What is the likelihood of that? The average life of a mortgage is 3-5 years (estimated by Douglas Duncan, chief economist at the Mortgage Banker’s Association of America). So you must look at breakeven points and how long it will take you to breakeven paying costs in comparison to not paying closing costs. I’ve put together a simple comparison below.

Example: Mr. & Mrs. Homeowner are buying a new home for $300,000 and putting 20% down giving them a new loan amount of $240,000. They have a choice of paying closing costs or not paying closing costs. This is how their options may look.

As you can see, with both options two and three, it would take them around 4 years to breakeven and recoup the closing costs they paid in option one to have the slightly lower monthly payment. A lot can happen in 4 years. Also, the 4 year breakeven point doesn’t take into account the time value of money which will actually lengthen the breakeven point.

Interest rates are a traded security similar to stocks. So, if you’re going to pay closing costs, you’re essentially saying that you’re betting that you are buying the rate at the lowest point. Very similar to wanting to buy a stock at it’s low point. Now, many mortgage professionals have access to economic reports, bond quotes, as well as bond forecasting which lets them know what bonds are doing now and where they may be headed based on economic information that is released weekly. But are these tools foolproof? No, they are not. There is absolutely no way to time the market perfectly. This is especially true when purchasing a home as there is a specific timeframe one must close in which prevents you really being able to try and time the market. This is the first reason that I do not think it makes sense to pay closing costs.

Reason # 2 is that the bond market, which is what interest rates are based off of, are cyclical just as the stock market is cyclical. Historically, there are small cycles every 3-6 months and then larger cycles every 3-5 years. If you don’t pay closing costs, you can refinance again typically at no cost every time the rates drop a minimum of .125%. Since you’re not paying costs, any interest savings is immediate. With this, you can use the market cycles to your advantage.

Reason #3 I recommend no closing cost loans is because life happens and you don’t ever know where it will bring you over the next 4 or so years. You may have a child and move unexpectedly into a lager home. You may be facing a possible layoff and need to increase your monthly cash flow by moving to a 30 year term, or you may receive a promotion and decide you want to pay off your mortgage more quickly by moving to a shorter term. You could get relocated by your employer. Not investing thousands of dollars in closing costs allows you the flexibility to move in and out of loan programs as your life needs change.

There is one last point I’d like to make that many people seem to get confused with. A no cost mortgage is where the closing costs are paid by the mortgage originator. They ARE NOT rolled into the loan. Many un-professional mortgage originators advertise this type of mortgage as no cost or no out of pocket expenses. They are really just hiding the costs in the loan amount so please don’t be fooled by this.

I hope this article has helped to clarify no closing cost mortgages and answer any questions that you have. For any additional questions, please feel free to contact me at cdecandia@lenderforlife.net, or visit me online at www.lenderforlife.net.

Cari DeCandia, CRMS

Certified Residential Mortgage Specialist

Primary Residential Mortgage, Inc.

Cary, NC

The 2010 Conforming Loan Limits

A conforming mortgage is one that, quite literally, conforms to the mortgage guidelines set forth by Fannie Mae or Freddie Mac.

Each year, the government sets the maximum allowable loan size for a conforming mortgage, based on "typical" housing costs nationwide. 

Loans in excess of this amount are typically called "jumbo".

While home prices increased from 1980 to 2006, so did conforming loan limits.  Since then, however, as home prices have dipped, the conforming loan limit has held.

Now, in 2010, for the 5th consecutive year, the government set $417,000 as the nation's conforming mortgage loan limit.

The 2010 conforming loan limits, as released by the government, are:

1-unit properties : $417,000
2-unit properties : $533,850
3-unit properties : $645,300
4-unit properties : $801,950

But conforming loan limits don't apply to all U.S. geographies equally.  As a result of various economic stimuli since 2008, the government now considers certain regions around the country "high-cost" areas.  In these areas, conforming loan limits can range to $729,750.

There are less than 200 such areas nationwide.  The complete list is published on the Fannie Mae website (www.efanniemae.com).

For more information on conforming loan limits or other mortgage related questions, please contact:

Cari DeCandia

919.858.0022

www.lenderforlife.net

Raleigh, North Carolina – 06/26/2009 – DNJ Mortgage today announced that Cari DeCandia has earned the Lending Integrity Seal of Approval from the National Association of Mortgage Brokers (NAMB). The new seal recognizes individual brokers and loan officers who meet the industry's highest standards for knowledge, professionalism, ethics and integrity.

"I am proud to bestow this symbol of excellence on Cari DeCandia", said George Hanzimanolis, President of the National Association of Mortgage Brokers. "By earning this recognition, Cari has demonstrated a strong commitment to achieving the highest ethical standards in the mortgage business."

In order to display the Lending Integrity Seal, a broker or loan officer must:

" Pass a national criminal background check.
" Possess a state license or registration.
" Submit three business references (new members only)
" Attend professional education, including ethics training.
" Live up to NAMB's Code of Ethics and Standards of Best Business Practices
" Pledge to abide by NAMB's formal ethics grievance review process.

When a loan officer or broker displays the Seal, it means they have voluntarily met the only national standards for mortgage originators, established by the National Association of Mortgage Brokers.

"The Lending Integrity Seal of Approval is transforming the mortgage industry," Hanzimanolis said. "We believe it will soon become to the mortgage industry what the Good Housekeeping Seal of Approval is to the makers of consumer products."

For more information on the Lending Integrity Seal of Approval, visit www.lendingintegrity.org.

The National Association of Mortgage Brokers is the voice of the mortgage broker industry with more than 25,000 members in all 50 states and the District of Columbia. NAMB provides education, certification and government affairs representation for the mortgage broker industry, which originates over 50% of all residential loans in the United States.

Contact Information:
Cari DeCandia
DNJ Mortgage
1350 Sunday Drive
Ste. 109
Raleigh, NC 27607
Cari@dnjmortgage.com
www.lenderforlife.net

Local Heroes Get Break on Housing Crunch

With the recent release of NC economic data indicating a drop in the median income level, the rising cost of living, and increasingly rigid lending requirements, one local company, with an eye on important public servants, has set out to educate and prepare people for the new era in home buying.

As the current sub-prime fallout hits Wall Street and national real estate trends continue to stagnate, buyers are faced with risk evading banks and vanishing lenders. In lieu of these conditions, a statewide initiative by DNJ Mortgage dubbed the “North Carolina Hometown Heroes Program,” has been created to help reduce the strain on local teachers, police, fire & rescue, and military personnel. The program provides a package of benefits that includes an educational workshop series as well as an array of free and discounted services that can be used in conjunction with current government offers.

“The economy isn’t awful, but it sure isn’t ideal; times like these make it tough for those on budgets – lots of un-needed stress on people that we really depend on” comments Austin Herbert, senior loan advisor at DNJ Mortgage. With cooperation from regional real estate firms, DNJ’s program helps to reduce the cost and stress for home buyers and sellers by providing them with unique & county-specific, cost saving benefits.

“It’s our way of giving back – we really wanted to show our appreciation for our local firefighters, educators, etc...” comments Austin. “As the market continues to change, people are seeing the importance of being informed and up-to-date, it’s not like a few years ago….things have totally changed.”

“I found that what a lot of people need is just some straight-talk about their financing options” remarks senior advisor Cari DeCandia, “there’s too much confusion and misinformation floating around.” These borrowing options, which continue to dwindle, have started to come with tighter restrictions for borrowers. Banks now require higher down payments, credit scores, and incomes to qualify for loans. “People need to start planning ahead and being proactive with their credit management – and that’s what we teach in our workshops.”

The workshops are informational lectures which are held regularly and require pre-registration, but no admission fees. With local professionals stepping up to help their neighbors, the Hometown Heroes Program hopes to provide relief, education, and hope, for some of our most valuable community members.

ABOUT DNJ MORTGAGE– Providing North Carolinians superior home financing solutions and strategies for over 20 years.

CONTACT:
Cari DeCandia

DNJ Mortgage

919.459.6507

request@nchometownheroes.com

www.NCHometownHeroes.com

www.HomeTownHeroesNC.com

www.lenderforlife.net

Please read the blog titled "What is a temporary buydown and why is it beneficial?" to get a better understanding of the buydown product prior to reading this entry.

With DNJ Mortgage's temporary buydown products, we are prepaying the difference in interest between the note rate and the interest rate the first two years.  That prepaid interest is held in an escrow account by the lender.  Each month that you make a payment, the difference in interest for that month is deducted from the escrow account.  Since the goal with this product is principal reduction, you want to make as few payments as the lender allows and then refinance.  Typically the number of months varies from 4-6.

When we redo the loan, the amount that is left in the escrow account is applied as a credit towards your payoff.  This is a direct principal reduction credit. 

Here is a real analysis that I had put together for a customer of mine.  This should illustrate the power of this program.

Proposed Mortgage Structure (30 yr fixed with two year temporary buydown):

1st mortgage loan amount: $417,000

Interest rate for first year: 5.25%

Monthly payment: $2302.69

Monthly savings from current loan payment: $231.05

How it works:

With this program, we (DNJ Mortgage) are prepaying the difference in interest for the first two years between the note rate of 7.25% and the buydown rates. The first year the buydown rate is 5.25% and the second year, the rate is 6.25%. The total amount of interest we would be prepaying is $9829.44 and this amount is held in escrow by the bank.

Each month a payment is made, the difference between the payment at 5.25% and the 7.25% note rate is deducted from the escrow account. The amount deducted each month is $541.99. Since the ultimate goal with this program is the principal reduction, we would want the least amount deducted from the escrow account as possible. The bank requires that 4 payments be made which would leave you a total of $7661.48 if you were to refinance after the 4th payment. You would receive a credit on your payoff of $7661.48 which is applied directly to principal. That combined with your monthly savings would give you a total savings of $8585.68 for 4 months. We can redo this every 4-6 months to have the greatest principal reduction and lowering your effective interest rate tremendously.

Your total principal reduction in 4 months if you maintain your existing loan is $1633.66. In comparison, with this loan your total principal reduction would be $9587.48.

As you can see with this example, there is a tremendous amount of principal reduction in 4 short months.  It would've taken this customer 27 months to pay down their principal this amount.  This program drops your effective interest rate tremendously due to the interest savings over the course of the loan.

I understand that some of you might look at the 7.25% note rate and be fearful of that or consider it a greater risk.  As I explained in my initial blog on the buydown program, we can use this program as a hedge against higher rates because the initial rate on this program is about 1% below market rate.  Also, you are only in the program a short period (4-6 months).  If we see rates starting to trend one way or another, we can get into a lower fixed rate when you refinance.  Also, if you desired, you could use all or a portion of the credit towards a permanent buydown and get a fixed product below market for the entire term.

Please feel free to contact me at 919-459-6507 or cari@dnjmortgage.com for additional questions.

When we hear in the news that the Fed (Federal Reserve) cut interest rates... what does that mean?

The Fed is controlling the Federal Funds Rate which is tied to the Prime rate.  The Prime rate is specific to home equity lines and other short term interest rates.  Before the rate cut, the Prime rate was 8.25%.  Now the Prime rate is 7.75% since the Fed reduced rates by .5%. 

There is a common misconception that the Fed cutting rates will lower long term interest rates (ie. 30 yr fixed mortgages).  Unfortunately, the opposite occurred as fixed rates do not work that way.  Long term mortgage rates are based on Mortgage Backed Securities issued by Fannie Mae and Freddie Mac.  It is the trading performance of these bonds that will ultimately affect the direction of mortgage rates.

The key component is inflation. An increase in inflation is negative for any long term bond because future returns are decreased as the bond becomes less valuable. 

An indicator for consumers to watch to determine the direction of bonds is the Nasdaq/ stock market.  As the Nasdaq declines, mortgage bonds benefit causing mortgage rates to fall.  This is due to money managers and mutual fund companies moving funds into either stocks or bonds.  If stocks/ Nasdaq is trading higher, money is taken out of bonds and moved into stocks causing bond prices to drop and mortgages rates to increase.  The opposite occurs if stocks/ Nasdaq is trading lower.  Money managers then sell off their stocks and move money into bonds causing bond prices to go up and rates to go down.

In summary, it is not what the Fed does that causes rates to increase or decrease, but how the Nasdaq/stock market interprets what the Fed does that will cause rates to increase or decrease.