Frequently Asked Tax Credit Questions

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Here are some more Frequently Asked Questions. Please note that the answers may change as the Senate bill changes:

If I bought a home and used the $7,500 home buyer tax credit, can I retroactively receive $15,000 credit if it becomes law? No.

Are there any income restrictions on the tax credit? The Senate version currently has no income limits. The current $7,500 tax credit phases out on buyers with incomes exceeding $75,000 for individuals and $150,000 for married couples.

When will the new tax credit go into effect? The Senate version would take effect when the bill is signed by the president into law, and it would last for one year.

Can I take the tax credit this year? Yes. The Senate proposal would allow buyers — even those who purchase in 2009 — to claim the credit on their 2008 taxes. The proposed tax credit is nonrefundable. What does that mean? You can only receive the credit to the extent that you owe federal income taxes. The Senate proposal would give home buyers two years to claim the credit, so buyers could claim a $7,500 credit in 2009 and a $7,500 credit in 2010. A family of four that makes less than $82,000, for example, could have a tax liability of less than $7,500 and they would not receive the full value of the credit.


Are there any repayment requirements on the tax credit? No. The Senate proposal does not require the credit to be paid back. The House proposal eliminates a 15-year repayment provision on the existing $7,500 tax credit.

If I am eligible for the current $7,500 credit, am I also eligible for the $15,000 credit? While the $15,000 credit has fewer restrictions than the existing credit, there is one big difference: because the credit is nonrefundable, if you have a low federal income tax liability, you could end up receiving more money with the current credit than the larger, proposed credit.

Are there any increased down payment requirements on the proposed tax credit? No. A separate measure has been introduced in the House that would expand the tax credit to $15,000 but would require a 5% down payment on mortgages. The Federal Housing Administration currently requires a minimum 3.5% down payment.

Can I use the tax credit to buy a second home? No.
How long do I have to live in my home after I purchase it with the tax credit? The Senate version requires buyers to pay back the credit if they sell the house less than two years after they buy it.

Tony Auffant
www.tonyauffant.com
Senior Mortgage Consultant
Continental Home Loans Inc.

Closing Cost Assistance for First Time Homebuyers

New - November 15, 2008

The State of New York Mortgage Agency (SONYMA) provides safe, low interest fixed rate mortgages, closing cost assistance and other programs specifically designed to help low and moderate income families become homeowners. One of the biggest obstacles to owning a home is the amount of funds an applicant must have for down payment and closing costs.

To help applicants overcome this obstacle, SONYMA offers closing cost assistance, in combination with any currently available SONYMA program. One of the brightest features of the SONYMA product is a maximum assistance of closing costs equal to $5,000 or 3% of the SONYMA mortgage loan amount, whichever is higher. In addition to this assistance, no monthly payments are required, and the money is completely forgiven after 10 years.

$7,500 First Time Homebuyer Tax Credit

The Housing and Economic Recovery Act of 2008 outlines a tax credit for first time homebuyers. The amount of the credit is 10% of the cost of the home, not to exceed $7,500. Income limits are applicable, as well as property eligibility. In addition, purchasers (and purchasers’ spouses) may not have owned a principal residence in the 3 years previous to the purchase.

For more information about the topics covered in this article, please feel free to contact Tony Auffant at 631-241-4366.
Recent Economic Events Affecting The Mortgage Industry

September 23, 2008

The Fed announced plans to create a market place for illiquid mortgage debt. This should do a lot of long-term good to help the housing and lending environment. As if that weren’t enough, the Securities and Exchange Commission also placed a temporary ban on the short selling of 799 different financially related stocks.

What prompted these dramatic actions? Very dramatic happenings earlier in the week.

After 158 years in existence, Lehman Brothers filed for bankruptcy last Monday due to overexposure of high risk loans in the mortgage arena. Then, the Fed gave insurance giant AIG an $85 Billion lifeline to keep it from going into bankruptcy, after initially stating it would not intervene. Then it was announced that Merrill Lynch is being acquired by Bank of America, which will save them from the same fate as Lehman Brothers, and now troubled bank Washington Mutual is looking for a buyer as well.

Also playing a role was the fact that the Fed left its benchmark Feds Funds Rate (the rate banks charge each other for overnight lending) unchanged on Tuesday, not wanting to counter the recent improvements the US economy has made in the way of inflation. While this benefited Bonds and home loan rates earlier in the week, Stocks felt heavy selling pressure on the news… which added to the reasons for the actions taken late last week.

The government’s announcements on Friday are great news for the overall health of our financial system, though they did cause Bonds and home loan rates to move away from their best levels of the week. All in all, Bonds and home loan ended the week slightly worse than where they began. Additionally, stocks had their most volatile week in history- but ended the week almost exactly where they started.

by Tony Auffant
Senior Mortgage Planner
Continental Home Loans

WHY SELLERS SHOULD “SELL” AND BUYERS SHOULD “BUY” RIGHT NOW!

New - August 30, 2008

Lately many buyers are asking themselves is this the right time to buy? It seems a major contributor to this uncertainty and question is because buyers are wondering if they would be better off taking the gamble that home prices will continue to fall. Is this gamble a smart one? Should you wait and take that risk? The answer to both of these questions is “no”! While yes, it’s true that home prices are likely to continue to fall some, the more important factor that needs to be considered, and is also likely to occur, is that home mortgage rates will continue to climb. This is in large part due to the fight of growing inflation, increased foreclosures and the sub-prime mortgage mess. While the average mortgage rate for a conventional 30-year fixed rate is still relatively low compared to historic rates, aggressive buyers who wait around for rates to go lower have little time to react once rates start to climb.

But what about the seller? Should they wait to see if a buyer is willing to pay what they’re asking or even close to the asking price? Well, to answer that question, we have to consider several factors. 1- What is the motivation of the seller? Are they looking to purchase another home or even better yet, are they already in contract to purchase their next house? In a majority of cases, this seems to ring true for a large portion of sellers. If this is the case, it is far better for a seller to consider lowering the price of their house ”now”, or have a realistic price set in their minds that will attract buyers, than to wait for that “one “ buyer who is willing to pay top dollar…it’s not going to happen, not in this market!

This is where the professional real estate agent comes into play, and can help the seller determine at what price the house will probably sell at. And it would behoove the seller to take the advice of that agent, because they are the ones seeing what is selling now and at what price! Prices have been falling for more than a year as the subprime mortgage fallout, rising energy prices and other factors weaken the economy.

Second, which has already been mentioned previously, the longer the seller waits to get top dollar for their home, the more likely the interest rates for mortgages will go up. In a case where a seller waits to get $10,000 more than a buyer is willing to pay and interest rates go up .5 percent, what did a seller really accomplish? Nothing! I know it continues to be hard for sellers to stomach the fact that their house is worth a lot less today than it was a year ago, especially when for the past 10 to 15 years they have developed fond memories within the walls of these homes and they feel that that sentimental value makes their home worth a million bucks, even though logic says it will probably sell at $400,000! Still, a seller needs to come to reality and consider what the real estate agent is suggesting if they want to sell their home in a reasonable time and at a reasonable price.

Lastly, again in the case where a seller is looking to purchase a new home, logic says that although they may not be receiving top dollar on the sale of their current home, the likelihood is that they probably won’t be paying top dollar for their new home.

With all this in mind, it is well advised for both buyer and seller to get off the fence and make the deal NOW - before it’s too late and they lose out and gamble by playing the waiting game.

by Tony Auffant
Senior Mortgage Planner
Continental Home Loans

MARKET UPDATE: WHAT TODAY’S HEADLINES MEAN TO CONSUMERS AND OUR STRATEGIC PARTNERS

New - July 14, 2008

TOPIC #1- FHA Risk-Based Pricing Rules go in effect today. Many people are unaware that the FHA is basically a governmental insurance company. They do not lend money. They insure approved lenders (like Continental) for losses resulting from foreclosures on loans underwritten to FHA guidelines. Until today, every borrower was charged the same insurance premiums, regardless of the risk factors they were deemed to have. Now, depending on the determining Credit Score and the Loan-To-Value of the loan, both the Up-Front and Monthly Mortgage Premiums can vary. The higher the perceived risk, the higher the premium is. Talk to your CHL Mortgage Planner for more specifics.

TOPIC #2- Goodbye IndyMac (and 90 undisclosed lenders being “watched” by OFHEO). Banks being taken over by the government is certainly unsettling; however, this is all part of the cleansing process the financial services industries are facing, as a result of years of poor lending practices. The trials and tribulations of Bear Sterns, Countrywide, IndyMac, large write-downs by Citibank, Merrill Lynch and others are all symptomatic of today’s hangover from the party they all enjoyed the first half of the decade. For today’s borrower, it is clear that the lenders are going to be forced to charge more to lend money because they need to increase revenue now to make up losses from the past decisions. Less lenders and less mortgage products means higher costs of money. When you factor in the Inflation (from $140/barrel oil) and lower Consumer Confidence in the stock market (with the struggling financial services stocks) there comes a likelihood that rates are moving up.

TOPIC #3- FannieMae/FreddieMac Liquidity Challenges. The GSEs (Government Sponsored Enterprises) are privately-held companies with quasi-governmental guarantees. What that means is that the Mortgage Backed Securities that they create have the federal government as a guarantor. The headlines last week were largely centered on the cash position of the GSEs….are they liquid enough to absorb all the hits they are facing as loan delinquencies and foreclosures rise? Some members of the media (i.e. The New York Times) crossed the line from reporting news to potentially creating news with their hypothesis that the Federal Government might seize control of the GSEs, rendering their stock value as worthless. Treasury Secretary Paulsen has asked Congress and the Central Bank to make sufficient funding available for Fannie and Freddie. Bottom line, is that Fannie and Freddie are here to stay- not without bumps and bruises. They are essential to stabilizing the housing industry which remains a cornerstone to America’s wealth. Look here, too, for an additional factor for higher mortgage rates as the GSEs grab a bigger piece of the dollars generated by a mortgage to refill their holes.
To sum up, all indications point to higher loan rates which means that if you are looking to buy or refinance your real estate, get moving and lock in.

by Tony Auffant
Senior Mortgage Planner
Continental Home Loans

Pre-Payment As A Strategy? May 29, 2008

Many clients that we sit down with are of the belief that pre-paying their mortgage (either by additional principal payments, bi-weekly plans, etc.) is a sound financial approach; however, that “conventional wisdom” isn’t very wise. In reality, what the pre-payer is saying is this, “Here’s an extra $1000, Mr. Banker. Please don’t pay me any interest on this money, and if I need it back, I will pay you fees, borrow it on your terms and prove to you all over again that I qualify.” Money you give the bank is money you will never see again until you sell the home or go through the expense of a refinance.

We have already proven that Home Equity Has A Zero Percent Rate of Return. There is no logic to put your cash into an investment that has no rate of return; and further, it is an investment that is not liquid or safe. You are actually better off burying that $1000 in your backyard because at least, in that scenario, your cash is liquid and safe.

At the same time, handing your lender $1000 today that they weren’t expecting for 30 years is a windfall for THEM. Not only do they get to re-lend it and gain fees and interest on it again, but you are giving them inflated value. What we mean by that is simple. The $1000 today is worth $1000 today. It would buy $1000 of goods and/or services. If you waited to give it to the bank in 30 years (at a standard 3% annual inflation rate), then, $1000 will buy $400 worth of goods and/or services. Why would you give up your cash now?

“Conventional wisdom”, promoted by our parents/grandparents, friends/co-workers, and the media, points to the “years of payments or interest saved”. On the surface, it is a compelling argument; however, genuine analysis shows those numbers to be misleading. If I borrow mortgage money at 7% and I am in a typical 33% tax bracket, my real cost of money is under 5%. If I invested my cash in a conservative investment (like tax free municipal bonds or life insurance), I can reasonably expect a 6% tax free return. That 1% spread left alone to compound upon itself will earn you more money than you “save” by pre-paying AND it can keep you in a liquid, safe position.

Please contact me for a personalized analysis on how to utilize this and other strategies to increase your wealth, minimize your taxes and protect your assets (by cell phone at 631-241-4366 or via e-mail at tauffant@cccmtg.com).

Home Equity Is A Prudent Investment? NEW - May 7, 2008

We need to begin by defining a “prudent investment” because any investment that involves the serious money surrounding home equity has to be prudent. Ultimately, for an investment to be considered prudent, it must have three elements:

1. Liquidity- Can you get access to the cash deposited into your investment when you want/need to?
2. Safety- Is the principal invested safe, guaranteed and/or insured?
3. Rate of Return- Is the investment going to grow at an acceptable rate?

With a prudent investment defined, let’s look at “cash buried in your backyard” as an investment. Is it liquid? Yes (as long as you remember where you buried it.) Is it safe? Yes (as long as no one else knows where you buried it.) Does it have a Rate of Return? Most people answer No, but the real answer is Yes (because of inflation, cash actually has a negative rate of return.)

Well, what is the difference between the “cash buried in your backyard” and the “cash buried in the walls of your home” in the form of home equity? Actually, the “cash buried in the backyard” is more prudent because it is liquid and safe.

Home equity is neither liquid, safe nor has a rate of return; therefore, under no definition can home equity be considered a prudent investment! Home equity is not the same as cash in the bank; only cash in the bank is the same as cash in the bank!

Additionally, because of the “unplanned risks of life” (job loss, job transfer, disability, even death), often we don’t have the luxury of properly timing when we have to sell our homes. In those times when we have to sell, it is unlikely that we will get full value. In those instances, how “safe” was your home equity?

In the current real estate market, we see many clients who bought homes last year for the then average sales price in Nassau County for $500,000, only to find that less than eighteen months later, that the average price has dropped to $465,000. If those clients had put $100,000 down (20%), that $100,000 is only worth $65,000- which is a $35,000 loss on their investment (which translates to a 35% loss in their investment, not the 7% drop in the home’s value).

Ultimately, our approach to lending is comprehensive. We want to evaluate the situation and educate our clients to create the best solutions, taking into consideration their short and long term cash flow and investment needs. Please call me at (631) 241-4366 to discuss your home equity management tactics, before you lock yourself into the mistakes created by “conventional wisdom”.

by Tony Auffant
Senior Mortgage Planner
Continental Home Loans

Home Equity Has A Rate Of Return? NEW - April 4, 2008

Let’s start with a common scenario. A prospective home buyer decides to buy a home for $500,000. They intend to put 20% down ($100,000 cash) and take out a $400,000 mortgage. Now, a question……“What interest rate is being paid to the home buyer on their cash down payment?” After a pause, most people come up with the correct answer, “Zero”. Since, at the time of purchase, your down payment is your home equity, and home equity has no rate of return.

Paying “all cash” for your purchase (or honestly ANY principal reduction on your loan) increases your home equity. The result is more cash being put into an investment with a 0% Rate of Return.

We recognize that these facts appear counterintuitive. Usually, we find that clients have been conditioned by their parents/grandparents, their friends/co-workers, and even the media to believe that they should do as much as they can to pay off their home as quickly as they can. This well-intentioned advice is flat out wrong!

People argue that their home is the “best investment we ever made”. They confuse real estate appreciation with a rate of return on equity. They don’t recognize that their home’s value is independent of the debt against it. A home’s value is determined by what someone is willing to pay for it……….nothing else.

People argue that they bought a home in 1990 for $250,000 and sold it in mid-2003 for $600,000. A 140% return over less than 14 years! (We like to point out that if the same $250,000 was put into the Dow Jones during the same period, it would be worth almost $900,000! A 255% return!)

The reality is that the ability to leverage real estate is where rates of return become impressive. In the example above, our buyer likely put 20% ($50,000) down on their purchase. That $50,000 cash investment brought about a $350,000 gain ($600,000 less the original price of $250,000). That’s a 700% rate of return!

But what if the client had only put down 10% in 1990? That $25,000 still would have brought a $350,000 profit….our a 1400% rate of return. At 5% down, there would have been a 2800% return on their cash investment!!!!

The bottom line is this….while we have all be taught the “conventional wisdom” of large down payments and principal reduction strategies, the truth is having less home equity and leveraging the asset to the maximum is a more powerful tool in wealth accumulation. When used in concert with other tactics, proper home equity management can significantly impact a family’s long term wealth accumulation.

To examine your individual situation and your current plans to harness the power of a mortgage, please take advantage of our free, no obligation consultation and call me today at (516) 528-9008.

by Tony Auffant
Senior Mortgage Planner
Continental Home Loans

Do You Know What Type Of Lender You Are Using?
It Does Make A Difference!

Research has shown that to a large portion of the general public, there is considerable confusion as to the types of mortgage lenders in the market place. Basically, in New York State, there are three different types of mortgage lenders- traditional banks, mortgage brokers, and mortgage bankers- each with their own distinct way of doing their business.

First, let’s explore the traditional bank. Licensed and regulated by numerous governmental agencies, banks are required to maintain substantial assets as protection for the consumer (unlike a mortgage broker who has no such requirement). As a result, the stability of a bank gives great comfort to their customers. As a direct lender, they are empowered to approve, lock in interest rates for, and close their loans. Further, they have the ability to portfolio their loans, which means they can have some flexibility in their underwriting. However, the typical knock on banks is their limited product menu (and potentially limited rate options) and the rigidity of the “bank mentality”- which refers to the bureaucratic processes within many large institutions. Often critics claim that bank employees are more concerned with “covering their behinds” than whether or not the customer is getting the desired level of service.

Next, let’s talk about mortgage brokers. Registered (as opposed to licensed) with the New York State Banking Department, mortgage brokers are legally unable to approve loans, issue commitments, or lock in interest rates because they are required to bring their loans to licensed lenders. To their credit, mortgage brokers tend to be experts in the industry because it is their only method of income. (Conversely, traditional banks have multiple income streams- car loans, credit cards, financial investments, etc.) Also, mortgage brokers usually represent a number of lenders, each with a number of programs, which enables them to offer a vast product menu and very competitive interest rates. Their entrepreneurial nature coupled with their thirst for finding a home for every loan makes mortgage brokers a major player in the lending world.

Finally, let’s look at mortgage bankers. Combining the financial stability required by their governmental regulators and the direct lending capabilities of a traditional bank with the wide product menu, industry-specific expertise, and entrepreneurial nature of the mortgage broker, mortgage bankers seem to have brought the strengths of the other two players, while eliminating the challenges.

As a licensed mortgage banker for 10+ years, I want to bring these competitive advantages to you, and become the real estate financing resource you need through the sharing of information and technology. Before you make any personal financing decision, call us and let us help you come to an informed decision.

Call Tony Auffant at (631) 241-4366 to discuss these and any other questions you may have about the mortgage industry and its players and processes.